Panelists Discuss State Of Industry In COVID-19 World And Beyond

Panelists discussed the “State of the Industry In A COVID-19 World and Beyond” to open the day September 30 at the virtual Inland Marine Expo, presented by The Waterways Journal.

Ken Eriksen, senior vice president of IHS Markit, served as moderator, with Merritt Lane of Canal Barge Company and Rob Innis, plant manager of the Sparrows Point, Md., division of LafargeHolcim, joining him as panelists. The session was sponsored by Sennebogen.

The men analyzed economic data to assess how the worldwide coronavirus pandemic affected the marine industry and what the future may hold for it. Innis, who also serves on the Inland Waterways Users Board, also discussed funding scenarios and a new rating system for capital investment strategy.

The discussion followed a welcome to the conference by Nelson Spencer Jr., publisher of The Waterways Journal, who thanked sponsors and participants. This was the seventh year The Waterways Journal has produced the expo.

Eriksen began by taking an overall picture of the effects of the pandemic on the country’s workforce, noting that it had slashed the Gross Domestic Product and Industrial Product Index by a significant amount.

“Consumers just stopped buying and stopped going out because they couldn’t,” he said.

More recent months have brought about the beginning of a sharp snapback in many cases, including with ocean freight rates.

“They snapped back as China reopened and started bringing in more coal, more iron ore and trying to get things stabilized again,” Eriksen said.

He also said there is strong momentum in the grain market and strong exports.

In looking at key post-COVID outcomes and considerations, Eriksen noted that in labor-intensive production, labor becomes a priority as robotics and new technology replace low-wage labor. Shorter supply chains also become a hedge against disruption and cross-border impediments, he said.

Global trade negotiations have become more contentious, Eriksen said. New technologies are also having an effect, including using gene editing in the agriculture industry to increase productivity, reduce costs and meet consumer and policy demands. Continued efforts to address environmental needs, including decarbonization, are also gaining momentum, he said, with benefits from second-generation biofuels and attention to carbon sequestration on farms.

Eriksen encouraged companies to “adjust fast and make it happen,” shifting their emphasis as necessary as supply chains adapt to the impacts of COVID-19. In some ways, the marine industry is at an advantage over other sectors of the economy, he said.

“This construct has built-in social distancing with fewer people involved per unit moving commodities and products as larger, bulky moves,” he said.

Moving forward, Eriksen said companies that come out of the pandemic well will include those having the ability to be well-capitalized or have access to capitalization along with having the ability to be flexible and adapt quickly to supply chain dynamics and changing commodity consumption patterns.

As for the fleet of U.S. barges, economic data show the U.S. barge fleet shrank in 2019 with fewer dry open and covered barges, but that was offset somewhat by an increase in the tank fleet.

“You’ve seen cargo volumes staying relatively high,” Eriksen noted.

A challenge will be with grain exports as a result of the U.S./China trade deal along with increasing competition, both in South America as well as from the former Soviet Union.

“I will say at least on the covered side of things to remember that 60 percent of what moves in a covered hopper barge is agriculture-related,” Eriksen said.

Another challenge, he said, is that scrap metal prices are not elevated enough to incentivize the replacement of aging equipment.

The forecast for this harvest season continues to suggest grain exports to set a record, however, at nearly 5.8 million bushels, a sharp increase from two years ago, Eriksen said.

“China is coming in and buying a lot of soybeans and a lot of corn,” he said, but added that comes from all sources, not only from the United States but also particularly from Brazil and the Ukraine.

He anticipated the peak export period will be manageable this fall with adequate fleet capacity and what he called decent navigation conditions, adding, “But any glitch can really back things up here as we go forward.”

Meanwhile, he said, U.S. open barge utilization is riding lower on falling coal, and tank utilization is relaxed because of COVID-19 impacts to volumes.

2020’s Unique Challenges

Lane spoke about COVID-19 impacts on marine operations and the market; the 120-day Illinois River lock closures; and an active hurricane season that has produced four significant storms affecting Lower Mississippi River and Gulf Intracoastal Waterway operations as well as refinery, petrochemical and export shipping industries and their personnel.

Canal Barge Company (CBC) has responded to COVID-19 with two initiatives, called Care For People and People Who Care. The first initiative seeks to ensure that facilities and vessels employ best practices to keep employees safe and well as well as staying up-to-date on science-based knowledge about the virus. The second encourages employees to be disciplined and practice COVID-19 protocols both at work and at home.

“That’s our expectation for employees to exercise personal responsibility,” Lane said.

So far, the company has had 37 positive cases companywide out of more than 900 employees, and none of the cases have been serious. A large majority of those cases developed at home and not at work, Lane said.

For shoreside personnel, about 75 percent are back in the office, although CBC continues to use Zoom and Microsoft Teams for both routine and significant meetings and to keep in place crew change and vendor interaction protocols. A daily questionnaire app pops up on employees’ phones at 7 a.m., reminding them to pay attention to symptoms that could indicate potential infection. CBC also was cognizant of COVID-19 when replacing an air conditioning system in its headquarters, taking air movement and flow into consideration. Additional facility upgrades have included installing technology in all conference rooms to make videoconferencing from a distance easier.

“We’re trying to do everything at a distance,” Lane said. “We assume that Zoom and (other videoconferencing and business) technology will be a part of our lives going forward.”

CBC began considering the possible impacts of COVID-19 in January, in case it spread significantly within the United States. “We started to do it as a drill only to find out that it was not a drill,” Lane said.

Lane also took a look at market reports indicating what he called a tough second half of 2020.

“Unlike some prior downturns, this is mostly demand-driven,” Lane said. “Generally, cargoes tied to energy are down, and those tied to food, packaging and household goods are stable.”

In looking at liquid cargoes specifically, refined products and feedstocks are down, black oil is down and chemicals are stable, with isopropyl alcohol and other products used in cleaning supplies up.

In dry cargoes, coal, pet coke and steel are down, grain solid to up and crushed stone for construction products and rip rap for revetment work stable to up.

For deck cargoes, oilfield services are down and industrial facilities, liquefied natural gas and bridge construction businesses have largely been finishing projects begun before the pandemic, generating questions about a backlog of work to be done in the future.

To get an external view, Lane looked at McKinsey & Company’s five forces of COVID-19: reduction in mobility, altered workforces, supply chain resiliency, governmental and regulatory uncertainty and evolution of the virus.

He noted that discretionary mobility is down about 40 percent in countries that have not controlled COVID-19. The psychological impact of low confidence in the marketplace has led to a return to simpler lifestyles and drives indecision, including delay in investments and increased savings. Market indicators to watch include TSA passenger counts, refinery utilization, rail car weekly loadings and other indicators of consumer confidence. Key drivers could include schools resuming classes, the flu season, the upcoming election, winter weather and the possibility of a vaccine being approved.

The coronavirus has also changed workplace culture, negatively impacting hiring, onboarding, training and teamwork, Lane said. However, he noted that if relationships already exist, they can thrive even in a remote setting.

Liquidity and balance sheet strengths have become necessities, Lane said.

“I think supply chain resiliency is something companies are thinking about more than they have,” he said.

Additionally, he said, they are considering what he called relationship resilience, asking questions such as, “Do I know those folks I’m doing business with? Can I trust them?”

COVID-19 is a major issue in the upcoming November elections, adding to governmental and regulatory uncertainty, he said. And as for any vaccine to enter the market, it will take time to be widely available and will be rolled out unevenly. There may also be some reluctance to take the vaccine in those to whom it is made accessible, he said.

Lane said it will be important to maintain a focus on business continuity and quality regardless of how the virus evolves. In particular, businesses would do well to pay attention to employees’ mental fatigue and stress, especially for families with school-aged children and those with unemployed or sick relatives.

McKinsey & Company’s survey of global CEOs suggests it will take time to return to pre-COVID GDP levels, Lane said. He suggested it will happen no sooner than late 2021 and will include definite winners and losers, with some businesses affected permanently. The better news, Lane said, is that COVID can be used as a catalyst, as an opportunity for businesses to position themselves better relative to competitors. It is also likely to lead to an acceleration of trends, with the strong becoming stronger and innovators thriving.

“Nothing’s on auto-pilot,” Lane said. “There’s a greater sense of urgency. It’s a great opportunity to empower our employees.”

Finally, Lane noted that the closure of the Illinois River has had a major effect on CBC, which began planning for the four lock closures two years in advance and notifying customers a year in advance, along with pre-staging 80 tank barges and 60 open hoppers above the locks. During the closure, CBC employees have used downtime to accelerate maintenance on vessels and committed to not having mariner layoffs or furloughs, he said.

So far, Lane said, it appears the Corps is on track to have the work completed and the locks back open by November 1, as scheduled.

Looking To The Future

Innis noted that LafargeHolcim has had no positive coronavirus cases at its Sparrows Point plant and very few across all operations but that consumer confidence and consumer sentiment have taken huge dives. He noted indicators of increased discretionary mobility but also increased infection and said an unknown factor is still, “What happens as we go into flu season?”
Additionally, Innis emphasized the importance of relief legislation. The CARES Act has been hugely successful, he said, “But what happens next, and where does that go? What kind of federal government support is coming to individuals, businesses and states?”
He noted that the gradual expiration of the CARES Act comes in the context of 16 million people unemployed.

“With the subdued demand, many small businesses are going to close by the end of the year,” he said.

Innis looked at two different recovery scenarios, one of which would have past peak real GDP not reached until 2022 and the other in 2023.

“LafargeHolcim is looking at more of a delayed recovery based on what we’ve seen so far from the federal government,” Innis said.

He noted that up until March, the cement industry was setting records, but that it started to see a downturn in July and August, way below last year’s numbers. June through October are normally key months for construction, but construction-related businesses aren’t going to see the big upticks this year, he said, and they will continue to see reductions.

In looking at mortgage rates, they are down significantly, Innis said, and that has allowed the housing starts to stay consistent.

“With the rates we’ve seen we’d normally expect this to be a skyrocketing market for housing starts, but we’re just not seeing that,” he said.

The biggest impact has been in the nonresidential division, in the business community. Businesses have made changes and slowed or stopped projects, he said.

“It’s really dependent on the funding from the federal government what’s going to happen,” he said.

He noted that oil and gas drilling is backing off, which is a big area for cement and construction materials. State revenues also continue to be down.

Ultimately, he said, the outlook and impacts are affected by two key critical unknowns: “Is there a vaccine, and what’s going to happen with federal economic support?”
The best evidence regarding a vaccine is that it will not be generally available until the third quarter of 2021, Innis said. Again, he asked more questions concerning the vaccine that it will be important to answer before determining the future. “Will it reduce the death rate and be widely available?”

Inland Waterways Users Board

Innis also serves on the Inland Waterways Users Board and gave a brief update on the 2020 capital investment strategy, required every five years by the 2014 Water Resources Reform and Development Act. The slightly revised draft was submitted in August, Innis said. It is not binding, but instead a planning framework.

Innis noted that currently the United States has 242 operational lock chambers, and that 69 locks are more than 80 years old.

This year the board developed a rating system for capital investment strategy to make it less subjective, Innis said. Corps of Engineers and industry representatives all rated projects based on economics; reliability; condition; lock utilization; and national significance. Instead of looking at a single funding scenario, the board also looked at three different funding scenarios: a $250 million baseline, a $400 million level and what would happen if all projects were completed within 10 years.

The board also assigned one of four categories to projects and made no assumptions about how higher spending levels are to be achieved.

“I have to say I was very pleased with what came out of this,” Innis said.

Key recommendations include: an annual update of project-specific data for the capital spending plan; adopting a five-year budgeting of inland navigation with a continuing contracts clause or fully funding projects; and developing a national navigation model.

Also, Innis noted that COVID-19 has also had an impact on the Inland Waterways Trust Fund, which is about $20 million behind in expected trust fund contributions.