Key Takeaways:
A punishing European drought has drained the Rhine and Danube to record lows, forcing nuclear plant shutdowns and threatening to shave German growth to 0.5 percent this year.
A severe drought has pushed the Rhine and Danube to record-low levels, forcing Hungary to shut its only nuclear plant and cutting German growth forecasts to 0.5 percent as shipping and power generation buckle across the continent.
"We are operating up to the limits of what is physically possible," said Jens Schwanen, managing director of the German Federal Association of Inland Navigation, which represents the country's commercial shipping sector.
The Kaub gauge west of Frankfurt, a key navigability marker on the Rhine, dipped to 25 centimeters on Friday, near its record low from the October 2018 drought, and is expected to fall below 20 centimeters this week, the German Waterways and Shipping Administration said. Ships can now carry only 20 percent to 30 percent of their normal load through the chokepoint without grounding, forcing cargo to be spread across more vessels and pushing up freight rates. Germany's Low Water Information System said 44 percent of Rhine measuring stations and 78 percent of those on the Danube recorded extremely low levels at the end of July.
The disruption threatens to knock 0.3 percentage points off German GDP this year, with Carsten Brzeski, global head of macro research at ING, cutting his forecast to 0.5 percent from 0.8 percent if conditions do not ease. The 2018 drought wiped nearly 0.4 percentage points off German output, the Kiel Institute for the World Economy estimated, and economists warn of supply shortages and higher consumer prices, including at fuel stations in southern Germany, if the dry spell persists.
The most acute strain is on power generation. Hungary shut all four reactors at the Paks nuclear plant south of Budapest for the first time in 44 years after the Danube's water level fell too low to cool them, removing 40 percent of the country's electricity output. Prime Minister Péter Magyar warned of "the most critical five days" ahead as temperatures in Budapest are forecast to exceed 40 degrees Celsius, and the government has urged households and businesses to cut consumption between 5 p.m. and 10 p.m. while preparing rotating curbs on industrial users.
Romania's military set off explosives beside the Danube to divert water to the Cernavoda nuclear plant, where one of two reactors is offline, while Serbia cut output at coal-fired plants because cooling systems lacked water. The outages are expected to push up wholesale electricity prices across the region, and the European Commission said it was ready to convene an emergency meeting of its Electricity Coordination Group. A prolonged outage could deter manufacturing investment, said William Jackson, chief emerging market economist at Capital Economics, deepening a fiscal headache for Magyar, who took office in April.
German steelmaker Thyssenkrupp reduced hot-metal production at its Duisburg blast furnaces after low water forced it to pull its main push-barge fleet from service, while a run-up in benzene prices, an input for many chemicals, was partly driven by supply concerns, said David Potter, executive director at Chemical Market Analytics. Chemicals giant BASF has invested in shallow-bottomed barges to navigate droughts since the 2018 shock, but the longer the dry spell lasts, the more likely some producers suspend output, Potter said.
The Danube's receding waters have also stranded tourism. Border police evacuated 186 passengers from a Viking cruise liner that hit a sandbank near Vidin, Bulgaria, and operators including Viva Cruises have canceled or rerouted voyages. "Major parts of the Rhine and Danube as well as the Moselle and Main are not navigational," said Patrick Ell, a vice president at Viva Cruises. The EU's Drought Observatories said conditions remained critical across most of Europe, with forecasts pointing to "severely drier than average" conditions until September, while a World Weather Attribution study found climate change is increasing evaporation and making droughts more likely.
This article is for informational purposes only and does not constitute investment advice.
