Will the Jones Act cause Hawaii’s last sugar plantation to close?

by Michael Hansen, President Hawaii Shippers Council, November 16, 2015

The Kama’aina Big Five company, Alexander & Baldwin Inc. (A&B) released its third quarter results on November 5, 2015, indicating an operating loss of $9 million for their agribusiness segment. This was due to the poor performance of their primary agribusiness subsidiary, Hawaiian Commercial & Sugar Company (HC&S), the State’s last sugar cane plantation located on the Island of Maui. The cause of HC&S’s operating losses were poor growing conditions with too much rain and expenses relating to their elderly sugar-carrying vessel.

HC&S employs its 33-year-old Integrated Tug Barge (ITB) MOKU PAHU with HSTC-1 to transport bulk raw sugar and molasses from Kahului Harbor, Maui Island, to the sugar refinery at Crockett, on the San Francisco Bay in Costa Contra County, California. The sugar refinery is known as California & Hawaiian Sugar Company (C&H), which was once a cooperative owned by the Hawaii Big Five sugar plantations, but was purchased in 2005 by the American Sugar Refining Inc. (ASR) of West Palm Beach, Florida.

The owner of record for ITB MOKU PAHU and HSTC-1 is the Hawaiian Sugar Transportation Company (HSTC), which was once cooperatively owned by the Hawaii sugar plantations through their Hawaiian Sugar Planters Association (HSPA) and is now fully owned by HC&S. The technical ship management for the ITB MOKU PAHU with HSTC-1 is provided by Matson Navigation Company Inc.

An ITB is a uniquely American design intended to be a “rule or regulation beater” by addressing the twin domestic maritime issues of extraordinarily high U.S. ship construction costs and the high level of shipboard manning mandated by legacy union and U.S. Coast Guard (USCG) rules. An ITB is made up of two separate vessels -- a catamaran-hulled pusher tug and a barge with a ship style bow – that are fitted and lashed together in a rigid connection to approximate and act as a ship. The “tug” portion is inherently unstable and can only be safely separated from the “barge” in calm inner harbor waters.

An ITB addresses ship construction costs by resorting to tug and barge construction methods and standards, which are less expensive but produce a less efficient hull profile. The manning for the tug portion of the ITB is based upon the small gross tonnage of the tug (which is reduced by the catamaran configuration) and not the much larger barge section, resulting in a lesser manning scale than would be the case for a conventional ship under legacy U.S. ship manning rules.

The ITB MOKU PAHU may well have been one of the last built in 1982 and very few exist in the Jones Act fleet today. The U.S. maritime industry has turned to Articulated Tug Barges (ATB)’s which involve a “tug” which is actually capable of running safely independent of its barge and a more flexible connection system hence the use of “articulated” in the name. However, ATB’s are used primarily on the U.S. Atlantic and Gulf Coasts and are not considered suitable for open ocean passages such as between the U.S. West Coast and Hawaii.

Due to the large molasses spill of 233,000 gallons from tanks operated by Matson at Pier 52 in Honolulu Harbor during September 2013, Matson ended its practice of transporting molasses from HS&C to the U.S. West Coast. Matson would load molasses on its interisland container barges at Kahului, transfer the molasses to shore tanks in Honolulu Harbor and subsequently load the molasses in deep tanks on its containerships for shipment to the U.s. West Coast. As a result, HS&S had to make other arrangements and modified their MOKU PAHU / HSTC-1 to accommodate liquid molasses.

The ITB MOKU PAHU and HSTC-1 also required extensive refitting to meet special survey which when combined with the addition of molasses tanks would have represented a major capital expense. The capital cost was not disclosed. In addition, the addition of the molasses tanks to the Barge HSTC-1 reduced the lift capacity for bulk sugar and thus increasing the cost of transporting bulk sugar.

Given the age of the ITB MOKU PAHU and HSTC-1, the vessels should have been replaced by a conventional newbuild bulk carrier ship with deep tanks. However, the cost of constructing a newbuild bulk carrier ship (especially with molasses deep tanks) in the U.S. would be prohibitive. In fact, due to the newbuild domestic construction cost, there are only two conventional bulk carriers in the Jones Act fleet both operated by the International Shipholding Corporation on the U.S. Gulf Coast transporting coal and phosphates and built in 1980 and 1982 respectively.

The best solution for HC&S would have been to construct a newbuild conventional bulk carrier ship in South Korea or Japan with the needed capacities for bulk raw sugar and molasses for operation under the U.S. flag.

It is not unreasonable to think that the construction cost of such a newbuild ship in South Korea or Japan would have been around the same cost for the recent refitting and conversion of the MOKU PAHU and HSTC-1. A new conventional ship would have allowed HC&S to operate much more efficiently and possibly saving the State’s last sugar plantation from closing.

Key excerpts from A&B Quarterly Report:

Agribusiness revenue for the third quarter of 2015 decreased $4.7 million, or 10.3%, compared to the third quarter of 2014. The decrease was primarily due to lower raw sugar revenue in the third quarter of 2015, as compared to the third quarter of 2014, resulting principally from lower tonnage carried per voyage on the sugar vessel as a result of vessel improvements. These improvements reduce overall transportation cost by allowing the vessel to carry both raw sugar and molasses to the West Coast, but lower the per voyage tonnage capacity of raw sugar transported.

Operating loss for the third quarter of 2015 increased by $1.7 million compared to the third quarter of 2014. The increased loss was principally due to lower raw and specialty sugar margins from higher per ton production costs due to lower total expected annual production, partially offset by increased power margins.

Tons of sugar produced for the third quarter of 2015 was 36.6% lower than the third quarter of 2014 due to a decrease in the number of acres harvested and lower yields. Yields (tons of sugar per acre) continue to be negatively impacted by unusually poor weather conditions, resulting in sugar production levels that are substantially lower than the third quarter of last year and earlier projections. Although there were two voyages in both the third quarter of 2015 and 2014, sugar volume sold in the third quarter of 2015 was lower than last year, due to the sugar vessel improvements described above.

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SA: Poor sugar production sours A&B profit