Rhine/drought: low water levels will parch the German economy

Shallow waters mean deep trouble. A heatwave and drought are draining the Rhine. Barges must sail part-loaded, disrupting the delivery of raw materials. The blow to German industry could be even worse than in 2018 when water levels fell to the  lowest since the 1920s. 

Back then, 1.5 per cent was knocked off industrial production in November alone, according to the Kiel Institute for the World Economy. Chemicals giant BASF suffered a €250mn hit.

The river remains about 50 per cent higher than its 2018 low. But it is nearly a quarter lower than in August that year. Levels should subside further. The river, fed in part by glaciers, normally reaches its lowest point in the autumn. It is already getting difficult to pass at certain points.

Companies have begun to issue warnings. Utility Uniper last week  warned of limited output from a big coal-fired power station east of Frankfurt due to a shortage of coal supplies. It blamed low Rhine levels. Though inland waterways only account for about 6 per cent of overall German transport volumes, they are used to ship about 30 per cent coal, crude oil and natural gas.

Researchers from Kiel estimate that 30 days of low water levels on the Rhine reduce inland water transportation by about a quarter and industrial production by about 1 per cent.

Insurers will take some of the strain, particularly if there are claims on parametric insurance, a relatively new way of filling gaps in traditional policies. This is a kind of rapid-response cover that pays in full when a pre-determined trigger is activated.

Broker Jefferies suggests water levels might need to reach 30cm-35cm, about 15cm lower than current levels, to trigger policies. That could result in sizeable, but manageable, claims for the likes of French insurer Axa which has a parametric business, AXA Climate.

Companies that were hard hit in 2018 have tried to prepare for a recurrence. Measures include using ships with lower drafts, making greater use of rail and building up inventories in response to eatly warning signals. Given the growing frequency of extreme weather events, expect more of such self-help investment.

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