commodities

America's untamable river trade

December 16, 2011: 5:00 AM ET

The nation's barge operators have to wage a continual, chaotic, slow-motion battle of logistics.

By Ken Otterbourg, contributor

Coal barges passing through the Kentucky Lock

Coal barges passing through the Kentucky Lock

FORTUNE -- A standard barge is 35 feet wide and 195 feet long. It is 12 feet deep and sinks nine feet below the surface when loaded, pushing through the water like a brick. A standard tow has 15 of these barges -- three wide and five long -- winched together with cables and stretching nearly 1,000 feet, enough for the farthest point to disappear into the horizon at dusk and still be out of sight, hours later, in the mist of a new day.

Barges are a terrible way to ship iPods, automobiles, and anything that goes in your living room, closet, or refrigerator. They are built for shipping coal and grain and cement and benzene and asphalt, the heavy and still vital materials of our economy, products that are measured by the thousand ton, bushel, and barrel. There's no bar code. No real schedule. The barge could arrive today. Or maybe tomorrow.

Patience has become a lost virtue, nowadays less a sign of character than a slightly quaint habit, like wearing a bow tie. We hate to wait. And worse, we hate uncertainty, not knowing how long we might have to wait. But if you are in the barge business, hauling cargo at six miles per hour along rivers worn and twisted through time, and silted with the dirt of a thousand hills and fields, you learn patience. You wait for the flooding to stop and, later, for the low water to rise. You wait for the cargo to be loaded and unloaded and to go through locks. You learn to understand the wait and manage the uncertainty so that they cease to be sources of frustration and instead become something altogether different. Maybe not your friends. But certainly your partners.

Paducah -- it rhymes with "bazooka" -- is the heart and soul of the river business. It's a striving, weathered Kentucky city at the confluence of the Tennessee and the Ohio rivers. Just upstream is the Cumberland, and an hour south it all empties into the Mississippi. On pleasant evenings, the bleacher seats on the wrong side of Paducah's floodwall are filled with folks watching the boats go by. This has been a good year on the water. Cargo has rebounded, although it's well off historical highs. Low natural-gas prices and high commodity prices are driving traffic in the right directions. But the future is less certain. Prices for coal and corn are set globally, and a few miles south of Paducah the federal government is trying to build a new lock and dam, a badly needed and seemingly endless construction project that makes everybody in the river trade wince and worry. Patience goes only so far.

I boarded the Elizabeth Lane in Cumberland City, Tenn., which sits on a curve in the Cumberland River. The boat is owned by Canal Barge Co., which let me ride with their crews to see the river business. They gave me a life jacket, steel-toe boots, and a warning about Asian carp, which have been known to jump onto the deck. Nobody wanted me to get hit by a fish.

Canal Barge hauls mostly chemicals, but it also has a contract to carry up to 8 million tons of coal per year to the TVA power plant at Cumberland City, and the crew was waiting for coal barges to be emptied and returned. The unloading was taking longer than expected, so we waited into the night. Nobody seemed to care, least of all the captain, a gracious and resourceful man named Arnold Anthony. The coal wasn't going anywhere, he said, and the ups and downs would all even out over the course of a year. He baited hooks and, as we fished for catfish and bream in the shallows, he told me about how he had recently saved the life of a fawn by amputating its broken leg. I wasn't sure what this had to do with running a boat, but Anthony's crew filled me in. The captain, they said, is that rarest of managers, compassionate and direct, and a person aware of when he needs to be one or the other.

Roll on big river

A typical line boat has nine crew members: a captain, a pilot, an engineer, a cook, a mate, and four deckhands. The captain and the pilot rotate in six-hour shifts. So do pairs of deckhands. The engineer and the mate work as needed. A cook's day starts at 3:30 a.m., and meals are at 5 a.m., 11 a.m., and 5 p.m. Canal's crews do this for 28 days, and then they're off for four weeks. The boat is confining and isolated, and the work can be grueling or monotonous -- and frequently both. The lure of the water is simple. This is one of the last places in America where a kid out of high school with a strong back and work ethic can make $30,000 a year, with benefits and a career track that can lead to the wheelhouse, responsibility, and a six-figure income. As a plainspoken and capable crew member told me, "Where I come from it's pretty much sawmills and meth labs or driving a truck."

Capt. Randy Williams, who works on another Canal Barge boat, says he knows pretty quickly if his young deckhands are going to stay. He uses Facebook to keep in touch with their parents and establish support networks so that the home front doesn't distract his crew from their jobs. It's not just good manners. It's good business. His bonus is partly tied to crew retention. "You used to do most of your work looking out the window," he says. "Now, it's as much about management as anything else."

From left: Deckhand Ben Maddox and mate Rex Reid of the Elizabeth Lane; Anthony Arnold, the captain, in his bridge; the Elizabeth Lane at the TVA plant in Cumberland City, Tenn.

From left: Deckhand Ben Maddox and mate Rex Reid of the Elizabeth Lane; Anthony Arnold, the captain, in his bridge; the Elizabeth Lane at the TVA plant in Cumberland City, Tenn.

River companies tend to come in two flavors. There are the pure players whose business is running barges, and then larger companies, such as American Electric Power (AEP) and Archer Daniels Midland (ADM), which have enormous fleets that are tiny parts of their overall operations. For the past 20 years consolidation has been the name of the game, as smaller companies have sold out and many larger conglomerates have left the water to focus on their core businesses. Traffic is essentially flat, so the surviving players are reaping the benefits of a mature industry where self-imposed standards, regulatory compliance, and the cost of equipment keep new competitors out. Kirby Corp. (KEX) has more than a quarter of the tank-barge market and is one of the few public companies. Its barge revenues approach $1 billion a year with operating margins above 20%. Canal Barge has about $300 million in annual revenue and has grown through acquisitions and by positioning itself between the mom-and-pops and the industry's largest outfits. Merritt Lane, the third generation of his family to run Canal, says the company has done well enough to receive frequent purchase offers from rivals and private equity firms. "We've turned into one of the pretty girls at the dance," Lane says.

Like hotel rooms and airline seats, barges make money only when they're filled. And there's a sweet spot between supply and demand that can get out of whack if operators all start adding barges at the same time. "Good individual decisions become collectively bad decisions," says Lane. That happened a decade ago, as the industry's fleet surged to 23,000 vessels, and hauling prices dropped in the scrum for contracts. There are about 21,000 barges today, with most of the excess going to the recycling yard as steel prices soared. Fewer barges make the remaining ones more valuable but also increase the possibility that a vessel isn't where it needs to be. So the trick for operators is to make sure they have their barges where they need them, when they need them.

This is the battle of logistics, and it is a constant struggle on the river. Trucks have flexibility. The railroads own their track. The airlines have the FAA to sort out flights and impose order. The river is fixed and wide open. It is first-come first-served, and a weather event two states away can cause monstrous problems.

Craig Philip started as a rail guy, and his dissertation at MIT in 1980 was on optimizing freight car distribution. He's now the chief executive at Ingram Barge, which is based in Nashville and, with revenues in excess of $1 billion, is the nation's largest carrier. He still has a love of linear programming and pores over the spreadsheets that detail Ingram's operations, but he's not much closer to bringing order to the chaos out on the water.

"Trust me on this, we have tried and died trying to come up with models that will help you do all this stuff," he says. "If you take a person out here in our customer service area, the most significant skill they have to have is the ability to be comfortable with the fact that what they see tomorrow will not be what they expected to see when they left the office today."

In lieu of squaring circles, Ingram has created a hub-and-spoke system to manage the placement of its barge inventory and expedite the handoffs at terminals and mid-river. Quicker turnarounds help offset delays and allow the company to work closely with big customers like Nucor (NUE), which likes to put its mills close to the water.

There's a chart that people in the river industry like to hand out to drive home their message that the water works. It shows the capacity of a dry cargo barge (1,750 tons) compared with a railcar (110 tons) and a truck (25 tons). And they are quick to point out that a river barge uses far less fuel and has fewer emissions per ton mile than the road or the rail. Just imagine, they ask, what your morning commute might be like if all the cargo got diverted to the highway. It's an interesting parlor game, but it skirts the points that the river industry is smaller than one of the big four railroads and that the percentage of domestic freight that moves by water keeps falling. It's now about 5% by tonnage and less than 1% by value. The container business has largely bypassed the river, and even the expansion of the Panama Canal in 2014 is unlikely to change that any time soon. Despite the river's rates -- they can run a third less than rail -- and an enviable record on safety and reliability, the marketplace is responding to other cues.

You can see this in the Cornbelt, where a crop of some 12.4 billion bushels is expected this year. Corn production has soared more than 30% in the past decade, but the amount that moves by barge -- about 1.2 billion bushels -- hasn't budged. The reason is ethanol, a boon to farmers but mostly a bust to the barge operators. Billions of bushels are going to ethanol plants rather than taking the trip to the Gulf of Mexico and ultimately to feedlots in China, South Korea, and Japan. As long as the race for the presidency starts in Iowa, that situation isn't likely to change.

It's a different story on the Ohio River, which hugs the northern shore of Kentucky and is on many days an endless parade of coal barges, pushed by line boats like the Elizabeth Lane that supply the utilities spaced along its banks. Roughly 60% of the cargo on the Ohio and its tributaries is coal, 136 million tons in 2009, some 80,000 barges, and about 15% of the nation's coal consumption. Total tons are down 16% from the early 1990s, a drop closely tied to utilities' shutting down older coal plants, but the decline is less a problem for the river companies than you might think.

The reason is that tonnage is only half the equation. Distance is the other half, and the coal being burned is now from Western and Midwestern mines and making longer trips to the big utilities. "Coal companies are in the ton business," says Steve Little, the president of Crounse Corp., the largest barge operator based in Paducah. "We're in a ton-mile business. That's the relevant metric. You throw in on top of that export coal going to New Orleans, and you increase the demand on our equipment even more."

Most companies haul lots of products. Crounse hauls only coal, and it's a business model that has paid off handsomely. The company's home is a swank new headquarters that features a panoramic view of Paducah's waterfront and LEED certification, which ties in nicely with the industry's efforts to rebrand itself as clean and green, regardless of the cargo.

The big chokepoint

What we call rivers are really water-management systems. The flow of the Ohio or the Illinois or the Upper Mississippi has for nearly a century been corralled into long, serpentine lakes, and controlled by the locks and dams that let the tows travel above St. Louis to St. Paul and from Cairo, Ill., to Pittsburgh and beyond. Most of the equipment was installed by the Army Corps of Engineers in the early 20th century, then upgraded and expanded in the 1960s. But a lot wasn't, and those locks and dams are falling apart, creating delays. Even in a business where waiting is the norm, time is money. There's a trust fund to pay for repairs and lock expansions, but it's being sucked dry by a single runaway project, with no end in sight.

The Olmsted Locks and Dam will replace two ancient and deteriorating locks and dams, known simply as 52 and 53, that sit just below Paducah near the end of the Ohio River. This is a chokepoint -- about 13% of all river cargo passes through here. The construction site at Olmsted swarms with workers tending to an enormous gantry crane that can lift 5,000-ton concrete forms. In the river is a $30 million catamaran that floats the forms into place to create the new dam. Most such projects involve diverting the water before building the dam. That was the original idea for Olmsted in 1988. Then engineers convinced the Corps that it might be better and cheaper to build in the wet, with the river still flowing. That had never been done on such a large scale. Twenty-three years later there are locks but no dam, and the cost has jumped from $775 million to $2.1 billion and is still rising. Two-thirds of the increase is due to design changes. The other third is from inefficiencies, most notably the restrictions on multiyear commitments to funding, which drive up contractor uncertainty and costs for materials.

"People want to know, 'Do you have a handle on this?' " says David Dale, a deputy district engineer in the Corps' Louisville District, whose portfolio includes Olmsted. "We believe we do, because we've expended a lot of time on management control and on doing the assessments on how much it's going to cost, and we're getting closer to the point of releasing that number."

Since the mid-1980s, the industry has paid half the cost of construction into a trust fund through a fuel tax, now at 20¢ a gallon. For years the arrangement helped build new locks and refurbish old ones. Olmsted changed that. The balance in the fund, once more than $400 million, has been nearly wiped out. The money coming in -- about $80 million annually -- can pay for this one project and almost nothing else, pushing back some other needed projects for decades. Last year river haulers proposed what they thought to be a grand bargain. They would pay more in fuel taxes in exchange for improvements in the management of these big projects and for limiting the trust fund to building locks but not dams (the idea being that lots of people benefit from the lakes created by the dams). They have gotten nowhere. The administration's most recent proposal supports getting more revenue from lock fees but doesn't want significant changes in construction methods or funding responsibilities. And the Republicans don't want anybody's taxes going up.

Big federal river projects are easy targets on either side of the political aisle. Fiscal hawks hate the spending. Environmentalists hate the effects on ecosystems and all that burning coal. "This time, with the overwhelming debt that the country is accruing, they've decided to attack on both levels," says Mike Toohey, the president of the Waterways Council, an industry lobbying group. His first goal: to persuade the Republican leadership that his members helped elect that the higher gas tax the industry wants is less a tax and more a user fee.

"How can you continue to rely on a system that was built in the '20s and '30s and expect it to continue to perform way after its design life to keep the economy moving?" Toohey asks. "It just isn't going to happen without investment."

Wanted: River captains

Just past Paducah's floodwall, not far from the bars where deckhands freed from the rules of the river pound beers during happy hour, the Seamen's Church Institute has a maritime training center. New Coast Guard regulations are likely to push some captains into early retirement, and there's a need to find and train the next generation of men and women who can drive a boat. Capt. Greg Menke, the center's director, showed me the state-of-the-art simulators, which can re-create 1,000 miles of the river system and the feel of the wheelhouse right down to the drone of the engines. There's crew discipline and record-keeping and learning to respect the basic physics that govern pushing 22,000 tons of cargo. A body in motion tends to stay in motion, and by the time a captain realizes he's in trouble it can be too late.

The construction catamaran at the Olmsted Lock and Dam project on the Ohio River

The construction catamaran at the Olmsted Lock and Dam project on the Ohio River

The industry helped pay for the center, an investment in training and an act of faith that more professionalism leads to fewer accidents and ultimately to a better public image and greater success in the funding battles over the way the rivers are maintained.

"We deal with floods. We deal with droughts," says Little, who led the industry task force that developed the funding plan. "One year there's too much water. One year there's not enough. We're not hiding. We just don't draw attention to ourselves. That has turned out to be one of our challenges. The infrastructure is aging, and we have a compelling story to tell."

In a sense, the industry is victim of its past, a heritage that stretches back to long before our nation's founding. The business is so ancient that decision-makers may take for granted the skill and technology found on the river. Nobody's going to mistake a line boat for an 18-wheeler or a locomotive, but each has a job to do, and a job we need them to do. The Kentucky Lock is the last on the Tennessee River, and it's one of the projects that will likely have to wait until Olmsted gets finished before it gets a chance at improvement. Delays are frequent, and while the Elizabeth Lane sat in a six-hour queue, I talked with Eric Brummel, the boat's engineer. He worked in the California prison system before retiring to a small town in Missouri. Five years ago he saw a recruiting ad in a local shopper, talked it over with his wife, and became a deckhand. He was 58. "Nobody thought I'd last a year, but here I am," he said with a laugh. He knew how to work hard and how to fix things, and he quickly rose in position, and now has responsibility for everything below deck and much of the equipment above. Having proved he could do it, Brummel is retiring again. But part of him will stay on the river. His son saw the opportunity his father was given on the water, hired on as a deckhand, and is now in a steersman program, on the path to becoming a captain.

Finally, the Elizabeth Lane made its way through the lock, then down the Tennessee and into the Ohio, headed north toward a coal terminal in Uniontown, Ky. The river widens here, and the ghosts of the industry can be seen on the distant shores. We passed the tiny town of Golconda. Lock 51 was here, and the houses in the former lock village are now rented out as vacation cottages. An inscription in the abandoned sentry tower bears the word essayons, the original motto of the Army Corps of Engineers, French for "Let's try."

And then we rumbled north past Cave-in-Rock, which is exactly that. The cave extends into a limestone cliff, its mouth nearly at the water's edge. Before the rails and the roads, when the rivers carried more than commodities, pirates hid out in the cave and on this remote section of the Ohio set upon the boats to take what riches they could before help arrived.

Finally, the next morning, we got to Uniontown. It was raining, and the coal at the terminal glistened in the distance. But another tow had gotten there ahead of us, and the Elizabeth Lane would have to wait.

This article is from the December 26, 2011 issue of Fortune.

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