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A major river in Europe hit by drought could create economic havoc

Key Points
  • In 2018, low water levels on the Rhine made parts of it unnavigable. This caused production to come to a halt in places, increased manufacturing costs and disrupted supply chains in the industrial heartland of Europe.
  • A heatwave and drought has hit Europe again this summer.
  • In the third quarter of 2018, Germany's economy shrank by 0.2% before stagnating in the fourth quarter. The decline was partly attributed to low water levels on the Rhine that hampered industry.
Half loaded cargo ships pass by the low water in the River Rhine along the vineyards on November 13, 2018 in Osterspai near Sankt Goarshausen, Germany. Summer heat wave in Germany as well unfavorable wind conditions, and no rain left the Rhine - which begins in the Swiss Alps, runs through Germany, and empties into the North Sea - at record low water levels.
Andreas Rentz | Getty Images News | Getty Images

A heatwave in Europe is causing low water levels on the River Rhine — one of the continent's most important shipping routes — which could weigh further on Germany's vulnerable economy, experts have told CNBC.

Last year, low water levels on the Rhine made parts of it unnavigable. This caused production to come to a halt in places, increased manufacturing costs and disrupted supply chains in the industrial heartland of Europe.

There are signs a repeat performance could happen this summer with high temperatures and a lack of rainfall meaning that cargo vessels cannot sail fully loaded on parts of the Rhine, according to Reuters. In turn, that could hit Germany's economy that was dented by similar events in 2018.

"Approximately 80% of all goods that are transported via domestic water transport go along the River Rhine. Thus, it is Germany's most important waterway," Robert Lehmann, an economist at Germany's influential Ifo Institute research center, told CNBC Tuesday.

"Coal, oil and gas or chemical products are transported with a much higher intensity: 10% to 30%. These are the main goods at the beginning of important value-added chains, thus, low water levels at the River Rhine can immediately lead to restrictions in industrial production."

Ford Fiesta automobiles, manufactured by Ford Motor Co., sit on a barge sailing to Vlissingen, Netherlands, on the River Rhine in Duesseldorf, Germany, on Wednesday, Feb. 13, 2019.
Bloomberg | Bloomberg | Getty Images

In the third quarter of 2018, Germany's economy shrank by 0.2% before stagnating in the fourth quarter. For 2018 as a whole, the German economy grew 1.5% — marking the ninth year of consecutive growth but pointing to a loss of momentum for Europe's largest economy.

Much of that decline was attributed to weaker private consumption, as well as Germany's car industry dealing with new emissions standards. But low water levels on the Rhine were also seen as a contributing factor. Holger Schmieding, chief economist at Berenberg Bank, told CNBC Tuesday that when shipping on the Rhine had to be stopped last fall, German production of chemicals and pharmaceuticals fell by 10% from September to November and that translated into a direct hit to the economy.

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"While some of this reflected an emerging softness in demand, the impaired shipping was the major cause. Chemicals/pharmaceuticals account for 8.3% of German industrial output and 2% of overall German value added. So, a 10% fall in output of that sector maintained for a full quarter would reduce GDP (gross domestic product) for that quarter by 0.2 percentage points."

Hit to industry

Flowing from its source in Switzerland, via Germany and the Netherlands into the North Sea, the Rhine is used as a shipping route and is particularly important for transporting agricultural products, commodities like coal and oil, and chemicals production. At 1,223 kilometers long, the Rhine is the second-longest river in Central and Western Europe (after the Danube) passing through major cities and ports like Cologne, Dusseldorf, Rotterdam and Basel.

With Rhine water levels in 2018 reduced to just 30cm in some parts, this made it unnavigable for larger cargo barges prompting many producers to resort to using other means of transport or smaller barges. Although parts of the river remained usable, many barges were not able to fully load and were forced to ship smaller amounts, pushing freight costs up for producers.

According to the Central Commission for the Navigation of the Rhine (CCNR), a body that regulates the Rhine's navigation, the Rhine saw a 27% drop in transport performance in the third quarter of 2018, compared with the same period in the previous year, because of low water levels. Europe's other major river, the Danube, also saw its transport performance fall by 10%.

21 October 2018, Hessen, Ruedesheim: A passenger ship passing close to exposed rocks. Months of drought and lack of precipitation have reduced the water level of the Rhine to a minimum and in many places have made visible the bottom of the river, which is otherwise hidden metres below the water surface.
picture alliance | picture alliance | Getty Images

Chemical producer Covestro issued a 2018 profit warning due in no small part to the low water level that caused production losses and higher logistics costs. BASF, meanwhile, had to shut one of its plants as low water levels in the Rhine prevented barges from delivering enough raw material, a factor also affecting steelmaker Thyssenkrupp. BASF said supply disruptions caused it 250 million euros (almost $279 million) in additional costs.

Those companies, among others, have since announced steps to mitigate against repeat conditions and German authorities have reportedly convened to discuss measures to prevent water levels falling drastically again.

However, the president of Germany's WSV rivers authority has been widely quoted acknowledging there is only so much they can do to prevent the river drying out. "The Rhine is a natural river," Hans-Heinrich Witte said. "There are limits to what we can do to keep it open as an industrial waterway."

Time to panic, again?

With a current heatwave sweeping across Europe once again — one part of Germany registered a record temperature of just above 41 degrees Celsius last week — water levels on the Rhine are declining again.

Carsten Brzeski, chief economist at ING Germany, noted last weekend that the German economy is at "the most dangerous crossroads since 2009" amid weakening domestic demand and sentiment. The hot weather has just made matters worse.

"The current heatwave and the third consecutive dry summer is very likely to slow down growth in the second half of the year (again). The water levels in the Rhine have started to fall in a similar magnitude to last summer," he said.

Brzeski noted that the economic harm prompted in 2018 was only done when water levels dropped further during the very dry fall season.

"Therefore, it is too early to panic. However, if water levels were to drop further, leading to a repetition of the 2018 events, the entire economy would suffer."

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