CRU: Low Water on the Mississippi Threatens Aluminum

This news highlights the critical importance of the Mississippi River as a central artery of bulk commodity movements in the Midwest and Northeast through tributary rivers such as the Arkansas, Missouri, and Ohio.

Low water imposes several effects on river transportation:

• It reduces the amount of cargo that barges can load. Under normal conditions, a barge can hold about 1,500 short tons of bulk commodity, drawing about 9 feet of water. With the current low water conditions and risk of bottoming, barge lines will restrict loading as severely as 7 feet. That effectively reduces the cargo by 22%.

• This loss of gross weight is directly reflected in rates. The carrier has the same fixed costs of pushing the barges, so you can expect rates to rise proportionally.

• The size of the tows will be reduced. A typical tow is 15 barges, grouped three abreast by five barges long. With the current risk of obstructed channels in the river, these tows may be reduced to two abreast. That means longer delays getting your cargo on a tow either northbound or southbound.

• The speed of the tow will be reduced. Normally tows run 8 miles per hour. But with the current dangerous channel conditions, the tows are likely down to 5 miles per hour. This means longer transit times and less effective capacity on the river.

Aluminum does not employ nearly as much barge freight as the steel industry. But the problems on the Mississippi River will have some impact that bears watching.

Alumina shipments into Alcoa, Century and Magnitude 7 move by barge

There are four aluminum smelters either on the Mississippi River or close to it:

• Alcoa Warrick (Newburgh, Ind.) operating at ~ 110,000 metric tons/year, or 40% capacity

• Century (Hawesville, Ky.), currently fully curtailed with a nameplate capacity of 252,000 tons/year

• Century (Sebree, Ky.) operating at 215,000 metric tons/year, or full capacity

• Magnitude 7 (New Madrid, Mo.) operating at 160,000 metric tons /year, or 65% capacity

Each of these smelters is dependent on northbound barge movement of alumina coming either from imports or from domestic production in Louisiana.

Most smelter carry about 45-60 days of alumina supply on hand. Some of this inventory is a “bookkeeping” entry, with 10-15% of those stocks effectively unusable due to being “bridged up” or frozen in the storage tanks. So the effective stocks might be 30-45 days.

The problems at Memphis and Stack Island could bottleneck alumina barges and give the three operating smelters some challenges. Shipments could be diverted to rail but would be costly and create additional handling challenges.

Imported P1020 to the lower Ohio Valley moves by barge

The aluminum rolling mill industry has a large concentration of capacity in Kentucky, with mills at Lewisport, Ky., (Commonwealth), Logan County, Ky., (Novelis and Tr-Arrows), and Warrick County, Ind. (Kaiser). Southwire operates its largest aluminum wire mill at Hawesville, Ky. Each of these facilities receives imported P1020 via barge through public warehouses at Owensboro, Ky.

In normal times, the trade keeps a healthy depot stock at Owensboro to weather delays in arrivals of barges or vessels at New Orleans. However, over the past three months, traders have been liquidating their stocks at Owensboro due to a combination of strong demand, less than optimal financing conditions on the LME, and some concerns about possible lifting of Section 232 tariffs on aluminum. Owensboro stocks are now minimal.

A drying up of waterborne supply will force these mills to turn back to domestic rail movements ex-Canada. While these rail shipments may not cost more directly in the form of freight, if we see an uptick in inquires for spot rail metal, it might cause the Midwest P1020 premiums to finally find a floor. That would come after stead declines for the past six months. Midwest premium now hovers around 22 cents per pound over LME cash.

Outbound shipments of semi-fabricated aluminum are not impacted by the barge problem

Aluminum rolled products, extrusions, and wire/cable have never been users of bulk barge freight. This current problem on the river will have no impact whatsoever on the shipments of semi-fabricated aluminum.

What to watch for next

The first sign of repercussions may come in more spot demand for metal into the mills during late October. We will be paying attention to signs of increased demand for Canadian metal.

Alumina bottlenecks will likely show up in November or December, if at all. Shifting to rail movement in bulk covered hopper cars will be attempted, but this could be a daunting task.

Grain movements during the impending harvest in the Upper Midwest rely heavily on southbound barge movement. If grain shippers can’t get barges in enough volume, they will turn to those same covered hoppers in gigantic volume.

Shippers like Cargill will quickly mobilize to employ unit trains of up to 200 cars to move their grain from the Midwest to the Gulf Coast. This may sop up many of the available covered hopper cars, supplementing by their own leased, private fleets.

We will be watching spot rail demand first, then signs that the three smelters are straining at the seams for alumina. Stay tuned.

By Greg Wittbecker, Advisor, CRU Group, Gregory.Wittbecker@CruGroup.Com