Managing volatility in the barge market

A barge isn’t just or only a mode of transportation, it's an asset and a legal entity.

Barges represent a significant investment and operate as businesses, with staffing needs and other similarities to any commercial enterprise. Consequently, the majority of barges operate under legal entities such as a Private Limited Company (BV) or Limited Partnership (CV). Investments can vary from 4 to 16 million euro’s dependent on the barge size. Of which at least 30% is paid for in cash and 70% or more installed as a bank loan. A lot of stakeholders and cost are involved in the operation of a barge, to name a few; wharf, crew management, certificates, port costs and insurance.

When financing a barge, the investment and depreciation are typically considered over a 15-year period. It is possible for a barge to operate at a loss for a few years, while generating substantial profits in the following years. So just like a trading house or oil company, the barge owner must manage finances prudently to accommodate weak market periods and be able to pay its costs, as prices in both the barge and oil markets can fluctuate significantly.

In high-earning years, it is prudent to reserve some profits for leaner times ahead. The barge market, like the oil industry, is closely tied to economic cycles. While factors such as barge capacity and water levels also play a role, cyclical patterns are evident in the market given macro sensitivity, and it's exposure to geopolitics. Barge owners must also consider various costs, with bunker costs being a prime example. Four years ago, bunker prices surged, increasing by 20-30%. If a barge owner had agreed to a Contract of Affreightment (COA) or a Time Charter (TC) contract including bunkers at that time, profits could have been wiped out, potentially even resulting in a loss.

Other cost factors to consider include inflation-driven increases in staffing and equipment expenses. Recent events such as the COVID-19 pandemic and ongoing conflicts have exacerbated these costs, with the price of barge equipment and wharf visits rising rapidly.

Structure of the barge market

Before proceeding, it is important to clarify the roles of the three main types of companies involved in chartering, as the terms 'barge owners,' 'barge companies,' and 'brokers' can sometimes be confusing.

Barge owners

Barge owners are individuals, business partners, or families that possess one or more barges. Unlike technical operators, barge owners do not actively lease out their barges in the market themselves. Instead, their role involves owning and maintaining the barge, handling operational and financial responsibilities, and liaising with technical operators who manage the barge's market operations.

Technical operators

Barge companies, also known as technical operators or brokers, combine various roles in the industry. Unlike the dry bulk sector, where barges can operate with multiple companies, inland product tankers typically sail under the flag of a single technical operator. This exclusivity is primarily due to the higher risks associated with transporting oil products and chemicals.

A technical operator should have a dedicated safety department that oversees operations, conducts inspections, and serves as the primary point of contact for customers in case of inquiries or incidents. In the ARA (Amsterdam-Rotterdam-Antwerp) region and Germany, there are approximately 35-40 active technical operators in the market.

Many of today's technical operators began as barge owners. As their fleets grew, they sought to charter directly to oil companies, ensuring they met all necessary requirements to become technical operators. Over time, these companies started receiving requests from barge owners to sail under their flag and charter their barges on the spot or time charter (TC) market. In exchange, technical operators charge an average commission of 5%. As they function as both technical operators and brokers, it can sometimes be confusing with their 'double role'.

Brokers

There are a handful of brokers active in the market. These brokers typically do not own any barges and are not permitted to act as technical operators. Instead, they serve as intermediaries between oil companies and barge companies, assisting oil companies that prefer or do not have the time to navigate the market themselves. They also charge an average commission of 5%.

As outlined above, chartering a barge involves multiple stakeholders beyond just the barge owner. Barge companies and brokers must also manage barge volatility and their earnings. For instance, in strong years, their revenue may be €1-2 million annually. However, when freight rates halve, as is currently happening, their commission earnings drop accordingly.

Established Tonnage vs. Newbuilds

Do existing barges hold a competitive edge over newbuilds during price negotiations in volatile markets?

Barge owners are at varying stages of their loan repayments: some have fully paid off their barges, others are midway through their payments, and some have just begun, having recently taken the delivery of newbuilds.

Weak market

In a weak market, owners whose barges are nearly or fully paid off hold a competitive advantage over those who have only just started repaying their loans. This disparity becomes evident during time charter (TC) negotiations. An owner with a 6,000-ton barge, for instance, might be content to operate at break-even or with modest profits, enabling them to offer a daily rate of €5,000. Conversely, another owner might require at least €7,500 per day to meet their financial obligations. (fictive numbers)

Similarly, in the spot cargo market, owners who have paid off their barges can adopt more aggressive pricing strategies, undercutting their competitors by lowering rates.

Strong market

Conversely, in a strong market, these owners may exercise greater selectivity. They can afford to decline cargoes if the offered prices do not meet their expectations, opting to idle their barges temporarily rather than sailing at lower rates. This approach enables them to maintain their pricing integrity while awaiting more lucrative opportunities.

Currently, most barge owners or companies own multiple barges, providing them with greater flexibility to support one barge with another during weak markets when cash flow may be constrained which helps them navigating trough tougher times.

For the charterer there is no significant difference between a newbuild or an existing barge. At least not yet, this might come into play when charterers also have to offset their carbon foodprint by buying bio tickets. In that case the type of engine and type of bunkers used such as LNG can make a difference.

Part of the game

Volatility is inherent in the (freight) trading business, driven by supply and demand. However, when price fluctuations become extreme, companies seek alternative measures. For example, when prices for an ARA-Basel trip surge to €150,000, market participants may adopt different strategies. Shell, for instance, built its own Rhine fleet, and many other companies have withdrawn from the Rhine spot market, relying solely on Contracts of Affreightment (COAs) or time charters. Some oil companies have even shifted their transportation from barges to smaller vessels, rented storage in other various locations outside the ARA and Rhine region, or forgone certain deals due to unfavourable economics, or did not make that refinery export as there were times when barges were more expensive than smaller vessels.

Visa versa when freight rates are only negotiated downwards during less favourable times, the oil company might lose their preferred position when the markets eventually go up and will be paying more than others or are not able to fix capacity.  When freight rates are so low for a longer period, some owners might be forced to quit or don’t see any future in barging anymore as happened in the past already.

In it together

Ultimately, all stakeholders are interdependent: oil companies rely on barge companies for their operations, and barge companies need the business from oil companies. However, when prices rise, barge companies tend to maximise their gains, and when prices drop, charterers seek the lowest possible rates. One might question whether this approach is the most effective strategy for all parties involved.

As some might say; Create a win-win negotiation, a deal that make both parties feel satisfied.