As service center operators see the price of fuel escalate to new heights each week, watch their trucks sit in stalled traffic or pay demurrage charges on rail shipments, the prospect of receiving material by water becomes increasingly attractive. While barge trafficking of metals is a distant third among shipping options for service centers, experts say the nation’s waterways are an underutilized resource.
“We think bringing steel down the Tennessee River for most of the year has been very good for us,” says Roger Sippey, president of Feralloy Corp., Chicago. “We’d like to grow the barge business.”
“We like barge,” says Mark Haight, Northern division president of Infra-Metals, a member of the PNA Group with Feralloy. “If more mills could ship it by water, we’d buy from them.”
Haight’s second remark hints at the primary limitation of barge transport: obviously barges can only be used where navigable waterways exist. For the domestic market, that generally encompasses states along the coasts, plus the inland area between the Great Lakes and the Gulf of Mexico, from Pennsylvania to the Great Plains.
But where barge is available, and the service center company is large enough to handle barge quantities, it’s an effective way of moving metal, experts say.
Few distributors are more invested in barge transportation than Superior Supply & Steel, Lake Charles, La. The service center company has five plate stocking facilities, all located on the water or near ports. They include facilities in New Orleans and Morgan City, La.; Tulsa, Okla.; and Mobile, Ala.
In June, the company opened a new Midwest facility at the Port of Chicago’s Iroquois Landing. The new facility has deep water, rail and truck service, a threefold requirement for new Superior facilities.
“When we look to expand geographically, we look to take advantage of being on the water,” says Scott Sandifer, vice president at Superior Supply & Steel. “It’s one of our highest priorities.”
Sandifer says the appeal of shipping by barge has grown through the years. “A decade ago, inland waterway was maybe just an option. Today, inland waterways, for us as a distributor, are the preferred source of transportation.”
That preference is shared by Infra-Metals. The company is building a new plant in southern Ohio that will be located on the Ohio River. The facility will have truck, rail and barge access. “Barge is no good without rail. You need both,” Haight notes.
While having direct water access is optimal, service centers and other steel buyers have other options. Ports such as Tulsa’s Port of Catoosa allow multiple distributors to take advantage of barge shipments. More than a half-dozen metal distributors have facilities at the Oklahoma port, which offers drayage services, transferring material from the barges to its own short-line rail system for delivery to individual port warehouses.
Steel Warehouse, South Bend, Ind., has been using barge more frequently in recent years, as the rates have become more favorable. Steel Warehouse has one facility on the river in Chattanooga, Tenn., and others in barge metro complexes. But the cost must improve substantially for the company to expand its use of the waterways, says Dave Lerman, Steel Warehouse president. “There has to be a significant benefit on the cost, since deliveries always take longer than rail or truck.”
The time tradeoff remains the biggest hurdle for many service centers. “Time is a factor. Even from some of the domestic mills, the travel time for inland barge is a deterrent,” says Sandifer, who estimates his company receives 70 percent of its material by barge.
Factoring in the additional transit time can make buying decisions more complex, he adds, especially for public companies that must maintain very lean inventories. “That’s where we have an advantage as a privately held company. Other companies with lean inventories may not be able to use barge because they could run out of a product for a gap while waiting for a barge to come in. On our side, we can be more strategic in our inventory position.”
“What you have to keep in mind is time,” says Bradley Hall, vice president and general manager for dry cargo at Jeffersonville, Ind.-based American Commercial Lines, one of the largest shipping companies in the inland waterways. “It takes a little more planning, but most of the people we do business with understand that, and it’s not an issue at all.”
For many service center companies, it’s not the time factor that serves as a barrier to barge, but size. And that’s a hurdle that can’t be overcome with good planning. For barge to be an economical option when ordering steel, experts estimate, service centers must purchase 1,400 tons or more with each order. With the price of steel over $1,000 per ton, that’s an investment many small to midsize companies cannot afford.
Eagle Steel Products illustrates this problem perfectly. The company, located on the Ohio River at Clark Maritime Center in Jeffersonville, has a facility tailor-made for receiving barge shipments. And it does, unloading material from the mills regularly. None of it, however, is for Eagle Steel Products.
“The amount of steel required would be more than we would ever order,” says Shirley Ohta, chief executive officer of Eagle Steel Products.
Instead, her company provides tolling services for the mills and other nearby distributors, offloading, warehousing and processing material delivered on the river.
“We have several customers in the area who can bring in a barge load. We store it and ship it when the customer needs it,” says Ohta, whose company opened its location at the maritime center in the early 1990s. “That saves the mill and end-users on transportation costs. It’s so competitive, you have to squeeze out every penny.”
With the price of diesel fuel spiking to record levels, the differential between the cost to ship steel by truck and by barge is increasing. Boyd Hollingsworth, vice president of legislative affairs for American Waterways Operators, the Arlington, Va.-based trade group for the boat and barge industry, says skyrocketing fuel charges do marginally benefit waterways shippers. “Of the three ways to ship [truck, rail, barge], we are the most efficient. So as fuel prices go up, it’s going to make us more attractive.”
Still, Hollingsworth is realistic. “The higher fuel prices make us more attractive, but that doesn’t drive shippers to us in huge numbers. The increasing congestion [on roads and rails] is also a factor. But the fact we haven’t been the place where shippers traditionally look remains a negative,” he admits.
Shipping companies see that changing. “Over the last three years, we’ve had a lot more interest with major producers, the scrap suppliers and the service centers,” says David Parker, vice president of investor relations for American Commercial Lines. “All three of them are interested in term contracts. And not one-year term contracts, but multiyear contracts going out to 2012-13.”
One trend working in the shippers’ favor is consolidation of the steel industry. Whether it’s the acquisition of scrap facilities by minimills or service center mergers, the more companies handling larger tonnages provides additional opportunities to take advantage of bulk transport.
Daniel T. Martin, senior vice president and chief commercial officer for Nashville, Tenn.-based Ingram Barge Co., also sees increased interest in his company’s services. “As new minimills locate along the inland waterway system, volumes of steel-related cargoes are growing. Steel shippers should be assured that the barge industry does not have the same capacity and congestion issues facing the other modes.”
The capacity issue is a major selling point for the industry, Hollingsworth says. While highway travel is constricted in many places, and rail services are strained in the eastern half of the United States, the inland rivers are relatively empty. The industry estimates that the rivers are being used at only 60 percent of capacity, and the few bottlenecks are being addressed by the Army Corps of Engineers.
Hollingsworth says increasing use of barge travel is necessary to alleviate some of the overcapacity issues faced by the other modes.
“We’re not looking to take anything away from them, but projections for freight in this country are pretty staggering. It supposedly is going to double in the next 20 years. As that happens, shippers will look to every mode they can. We’re the mode that can put additional vessels on the water and have the capacity available pretty quickly and pretty inexpensively, compared to building another lane on the highway or laying more railroad bed,” he says.
Still, waterways are not immune from their own sort of potholes. High waters can limit or stall traffic on the river, which is even more costly than a truck stuck in interstate traffic because of the greater volume of material on the barge.
“We figure we do 50 barges in a given year,” says Superior’s Sandifer. “We’ve had 30 barges to date, and we’ve had only one delay. It’s a fairly low percentage. However, when you’re talking 1,400 tons of material stagnant at today’s carrying costs, it’s a substantial amount of money.”
Another speed bump for the inland waterway industry is the Transportation Worker Identification Credential, a federally mandated program to certify 1.5 million maritime workers for security purposes. Initially, the deadline for full compliance was September 2008, but the Coast Guard underestimated the number of workers who would need the card, and the new target date is April 2009.
“We understand the need for security, but we need to make sure that in the process of making us more secure we don’t restrict the flow of commerce. It’s a balancing act,” Hollingsworth says.
New Coast Guard Regulations,
Aging Fleet Spur Shipbuilding
Most service centers consider the barge market a greater opportunity for selling steel than receiving steel. As a steel customer segment, the shipbuilding industry is relatively robust and forecasted to remain strong for years to come.
“Boom is probably overstating it,” says Boyd Hollingsworth, vice president of legislative affairs for the American Waterways Operators, the trade association representing the shipping industry. “But construction is at a higher level than it was two years ago.”
Others in the shipbuilding industry are even more bullish. Superior Supply & Steel, with several locations near the Gulf of Mexico, is a major distributor to the shipbuilding industry. “It’s extremely busy,” says Scott Sandifer, Superior’s vice president. “Houston, New Orleans, Mobile are right in the heart of the ship and barge building business. Anything for us around the gulf is going to be good.”
“There is a major build program going on right now,” says Bradley Hall, vice president of dry cargo for American Commercial Lines, Jeffersonville, Ind. “Our Jeff Boat division is launching about eight barges a week.”
Like other shipbuilders, Jeff Boat is already booked for all of 2009 and into 2010. “We’ve seen a lot of new power coming on the river,” Hall says.
That kind of long lead-time is one reason Harrison Bros. Dry Dock and Repair Yard has entered the fray. The Mobile, Ala.-based company had been focused on repairs, but saw the opportunity to grow its business
“It’s a cycle in which people are desperate to meet some Coast Guard guidelines and people are seeing the demand for river cargo increasing,” says William Harrison III, president of Harrison Bros. “Those two factors have come together to create a good market for barge construction.”
The regulations are the byproduct of the Oil Pollution Act of 1990, enacted by the U.S. Congress after the Exxon Valdez oil spill in 1989. Under the rules of OPA 90, all petroleum-hauling vessels in the United States by the year 2015 must be double-hulled to reduce the risk of spills.
The other factor driving the current surge in vessel construction dates back even further. In the late 1970s and early 1980s, Congress passed tax incentives that spurred a boom in shipbuilding. “We had a lot of people invest in equipment who were not part of the industry,” Hollingsworth says. “The bottom line is we got overbuilt.” As the average useful life of a cargo ship is 25 years, the fleet produced by that overbuild is finally in need of replacement.
Williams fears the industry’s optimism may be somewhat overstated. “It will take a couple of years to materialize, for it to become obvious whether it was over-optimistic or totally realistic.”
Hollingsworth is fairly confident the industry will not repeat the same mistake of 25 years earlier. One reason behind his confidence is the rising cost of steel. “If somebody’s got a barge, it’s not uncommon to decide between putting new plates in or biting the bullet and buying a brand new one. With steel prices like this, they’ll lean more toward refurbishing the asset and trying to get another five years out of it. Maybe five years from now prices will be a bit better.”
Daniel Martin, senior vice president and chief commercial officer for Ingram Barge Co., Nashville, Tenn., agrees that the price of steel is impacting the ship build. “The challenge facing the industry is recapitalization of an aging fleet of barges,” he says. “Ironically, recent steel price increases might work against the need to replace barges, since more than 300 net tons of steel is used in new hopper barge construction.”
For those who do decide to take the plunge on a new barge, Williams says his company has not had any trouble finding material in the otherwise tight domestic market. “We have not seen a lack of availability. We’ve only seen an increase in the lead times the steel service centers need to cut, blast and paint the steel.”
As for the steel price, Williams is not overly concerned. “As a builder, we have to pass it through successfully or it could drive us into financial ruin. With the contracts that have come on line recently, pretty much everybody knows they have to include escalator clauses.”
