US Inland Waterways Investments Support Ocean-Bound Economy

America often shortchanges its infrastructure needs.  That may change since the President signed the Water Resources Reform and Development Act (WRRDA) of 2014 into law.  The details on the WRRDA include a revised formula for funding lock improvements that do not hold the Inland Waterways Trust Fund hostage to a single installation.  The relevant House committee helpfully provides the bill's highlights.

The nation's waterborne commerce is vital to the economy, despite this report from Taxpayers for Common Sense that bemoans a decline in traffic volume on our waterways.  It may not have occurred to that group that traffic declines as waterways become less navigable and locks fall into disrepair.  This forces shippers to move by road and rail, which are more expensive per ton-mile than barge movements.   Lack of upkeep may very well be the reason waterborne commerce suffers.  The Congressional Research Service's May 2013 report on inland waterways provides a more balanced view of the cost-sharing funding arrangements for the Inland Waterways Trust Fund (IWTF).

Data from NOAA's ENOW series show the economic importance of ocean-bound commerce.  The IWTF's primary arteries connect the Great Lakes and Gulf Intracoastal Waterway.  Substandard locks and dams on those rivers jeopardize a significant amount of barge traffic in grains, coal, and petrochemicals.  Try running a modern economy without affordable access to those feedstocks.

Public infrastructure is expensive.  Highways, ports, and waterway systems must be serviceable for commerce to proceed.  The Waterways Council noted how multiple stakeholders, from the public and private sectors, recognized the need for waterway infrastructure modernization.  The new funding and management mechanisms under WRRDA came just in time.  

Full Speed Ahead For Containers On Barges

There's nothing surprising about inland waterways operators' surging interest in transporting containers on barges.  What's really remarkable is that it has taken so may people so long to realize this is worthwhile.  The Port of Pittsburgh completed a study in 2003 endorsing the concept.  The Connecticut DOT tentatively agrees, with caveats for increased capital outlays.  Inland port operators can handle the traffic but they will need to consider whether investing in large container cranes is justified by the projected additional revenue from container-on-barge traffic. 

One very serious potential obstacle is the potential for height limitations on barges stacked with containers.  Lock and dam upgrades will benefit all riverborne traffic, but double-stacking containers on barges will eventually require considerations of how bridges and rail overpasses spanning rivers will limit barge movements.  In the short term, MARAD and state transportation regulators can help operators plan routes that avoid low bridges.  Longer-term viability of this mode will require more infrastructure upgrades. 

Washington should pay attention.  MARAD needs to start attending meetings of the Transportation Research Board, where they can hear about the benefits of containers on waterways firsthand.  Stimulus money spent on riverborne infrastructure will pay dividends for decades.  Spending it to accommodate container cranes at inland ports will make some local politicians very happy. 

Profits, Profits Everywhere While Recession Returns

My title is deliberately confusing.  Lots of companies are reporting profits these days while high unemployment and commodity price inflation hobble the larger U.S. economy.  Oil supermajors are riding high in the saddle thanks to the mad props placed under oil prices by MENA madness.  Kirby (KEX), a well-run barge operator I admire, continues to do extremely well. 

These will likely prove to be isolated bright spots in an economy on the precipice of a further decline.  Housing recoveries traditionally lead broader recoveries.  Homebuilders are not recovering, reflecting the inability of the housing sector to lead the economy out of recession.  D.R. Horton and Pulte are not doing nearly as well as they were a year ago.  Their optimism for future growth is delusional. 

The recession never ended.  More confirmation is coming soon.

Full disclosure:  No positions in any companies referenced. 

Disastrous News for Inland Shippers On The Mighty Miss.

I'm glad I sold off Tidewater (TDW) once I saw its deteriorating fundamentals.  Now here's another reason to shy away from inland shippers and offshore servicers for a while.   Recent flooding has poured so much silt into the Mississippi River channel that business Brahmins around N'awlins are asking for $95mm worth of dredging.  That kind of money is more than double the Army Corps of Engineers' entire dredging budget, but don't think of this as a potential stimulus.  Emergency dredging has "broken window fallacy" effects.  That money will have to be diverted from something else that's just as urgent while Congress is trying to keep federal spending from triggering defaults (on federal contracts, not debt service payments). 

Things are thus worse than I thought on several fronts and I'm notorious for pessimism. It's bad news for barge operators, both captive oil company fleets and independent operators like Kirby (KEX).  Barge operators can do the math on how much less cargo they can carry if drafts are maxed at 43 feet.  Shippers of bulk grain and petrochemicals will have to calculate how much extra storage space they need dockside while they wait for underutilized barges to make return trips.  Excess inventory has a carrying cost.  Maybe this is good news for certain railroads whose trestles haven't been washed away by floods. 

Full disclosure:  No positions in either stock mentioned at this time.

Fuel And Weather Teaming Up To Hobble Transportation Sector

Wouldn't ya know it, just as I was preparing to turn bullish on the transportation sector, a bunch of Black Swans take flight.  Just look at how fuel costs are driving up consumer prices.  Transporters are passing on their fuel costs because they can't afford to eat them with margin compression anymore. 

Kirby Corp. (KEX) has been doing very well this year but now thinks that Midwest flooding will have a greater than expected impact on its bottom line.  I further suspect that the flooding will disrupt rail movements in affected areas.  Willingness to buy into railroads right now is a bet that the imminent opening of spillways won't deluge any Class I tracks.  Railroad bulk traffic has begun falling anyway, so buying rail stocks now might be premature until all of this news shakes out. 

Silver lining?  You betcha.  These accidents of history will make the stocks I'm watching cheaper in the short term.

Full disclosure:  No positions in KEX or railroad stocks at this time. 

Kirby Beats On All Counts

Kirby Corporation (KEX) has hit its numbers out of the park this quarter.  They've beaten expectations on EPS and have raised their earnings guidance for the rest of 2011.  The high price of oil may be a factor in pushing up earnings for this oil products carrier, but a stronger factor may be Kirby's overwhelming dominance of Mississippi River barge traffic. 

KEX's surging share price gives it a strong currency it can use for all-stock acquisitions if it wishes.  This one bears watching for the right entry point. 

Full disclosure:  No position in KEX. 

Possible Oil Price Spike Should Prompt Cheaper Transport

It just doesn't get any clearer than this. When Saudi Arabia's former oil minister says potential unrest in his country can lead to a serious oil supply shock, even casual observers should realize that the global economy is on thin ice.  Pursuing new hydrocarbon production can help mitigate supply shocks, and oil producers recognize the potential for unconventional oil sources to add to their proven reserves.  Note that healthy M&A activity in the oil sector now includes a big dose of unconventional resource plays. 

More production isn't the only way to keep the global economy on track.  More reliance on the most energy-efficient means of cargo transport - rail and barge movement - is in order.  Federal grants to improve passenger rail lines will likely have spillover benefits for freight rail.  The U.S. DOT has a plan to make America's waterborne "highways" strong enough to accommodate more container traffic.  These efforts are absolutely critical to keeping goods moving, since the trucking industry is unable to meet the current surge in demand for new trucks to carry freight. 

Speaking of demand for transportation, here's a related observation.  The most recent Cass Freight Index shows that monthly shipping activity rose 6.9% (13.8% yoy) while monthly freight payments rose by 6.3% (33.6% yoy).  Those yearly numbers are an alarming indication that the price of transportation is increasing faster than delivered volumes.  That's inflationary!  Rising fuel costs are undoubtedly a big factor in pushing rates up, and evidence is mounting that higher fuel costs are impacting service sector growth.  More focus on energy exploration and cheaper transportation can't come fast enough. 

Full disclosure:  Long TDW with covered calls.