Discovery Newsletter: Turn this ship around

January 1, 2017

This ship, Kristel, was built in 1963 and purchased by Koch in 1976. Today, Koch charters hundreds of ships per year for Koch companies and thirdparty customers.

Forty years ago, Koch Industries’ board met to discuss whether the company should buy a crude oil tanker for $4 million. That may not sound remarkable — until you consider that, in 1973, Koch’s overly optimistic shipping business began losing millions when Arab oil cutbacks and U.S. price controls hammered petroleum markets. Many employees avoided shipping for years afterward because of those heavy losses — losses that some felt threatened the very existence of the company. And yet, by 1976, Koch’s shareholders were expressing eagerness to re-enter that business. Today, shipping is not only profitable for Koch, it has become an essential capability.

ALL HANDS ON DECK

The variety and tonnage of products that Koch transports by ship is substantial. Georgia-Pacific relies on shipping to transport gypsum and tall oil (sometimes called liquid rosin, a by-product of the pulping process used to make kraft paper from pine trees). Koch Minerals uses ships to deliver millions of tons of pet coke, coal and sulfur to customers worldwide. For 30 years, it owned the C. Reiss Coal Company, operator of a fleet that has been transporting dry bulk cargoes on the Great Lakes since the 1880s. Flint Hills Resources uses its new terminal in the Corpus Christi ship channel to transport millions of barrels of crude as well as specialty chemicals. For more than 60 years, FHR’s Pine Bend Refinery has maintained a dock on the Mississippi River for receiving deliveries of crude oil. Koch Fertilizer’s growing network of ship terminals now includes sites in Australia, Brazil, France, Mexico, Spain and the U.K., as well as both coasts of the United States. The Koch business most associated with shipping is Koch Supply & Trading, which charters large vessels for deliveries worldwide. “We help all Koch companies ship more efficiently,” said Brady Cook, senior vice president of oil trading for KS&T. “Thanks to Koch schedulers in Geneva, London, Singapore, Houston and Wichita, we’ve truly got global coverage. “I suspect most people in Koch would probably be surprised to learn how much work we do for others,” Cook said. “As much as 80 or 90 percent of our cargoes are often devoted to third-party customers.”

FULL SPEED AHEAD

Koch’s emphasis on innovation is apparent in Koch Supply & Trading’s approach to shipping services. “We’ve taken a very traditional, utilitarian business — shipping — and done something very entrepreneurial with it,” Cook said. “We’ve completely changed our mental models about how it works. “Unlike most shipping companies, we don’t care about owning boats. We prefer to look at shipping as a commodity that can be traded. “Because there is now a futures market for shipping, we were able to create a trading book in freight. That unique approach helps us benefit other Koch companies that have specialized needs.” Cook notes that, “at a meeting we had with Charles Koch last fall, he emphasized that we definitely want to be in shipping. “We just don’t want to repeat the mistakes we made in the early 1970s.”

KOCHind.com/kst