Manufacturing Supply Chains Suffer from Record Low Rhine Levels

Manufacturing Supply Chains Suffer from Record Low Rhine Levels

Executive Summary

  • Record low water levels on the Rhine have caused logistical and procurement challenges to manufacturing supply chains in Europe
  • Chemical and steel plants along the Rhine have been forced to shut down production due to a shortage of raw materials, including at Thyssenkrupp, ArcelorMittal, BASF and Solvay
  • Auto, electronics and pharmaceutical companies are likely to face higher prices and even potential production disruptions over the coming weeks and months
  • Water levels on the Rhine are likely to remain critically low until at least mid-November, while logistical challenges could even extend to spring 2019

Background

Since July 2018, record low water levels on the Rhine have caused logistical and procurement challenges to manufacturing supply chains in Europe. Container shipping via barge has come to a complete standstill on a large stretch of the river, with containers and raw material cargo piling up at intermodal terminals from Dusseldorf in Germany to Basel in Switzerland. As a result, chemical and steel plants along the Rhine have been forced to shut down production due to a shortage of raw materials, which are usually transported via barge.

The Rhine is a critical European waterway, with roughly half of European river shipping using the river to transit cargo between Europe’s two busiest ports in Rotterdam and Antwerp and the Swiss city of Basel in 2017. Unless there is substantial rainfall in the coming weeks, some sources expect the low water levels and logistical challenges to continue into spring 2019.

Logistical Challenges due to Disrupted Barge Shipping

With water levels near the German town of Kaub, a key shipping corridor in the middle section of the Rhine, recently falling below previous record levels of 35 cm, container shipping via barge between the Cologne-Dusseldorf area and the Swiss container hub in Basel on the upper section of the Rhine has been halted since October 19. Fuel and bulk cargo barges were said to still be operating on an ad-hoc basis, albeit at very low loading capacities. To navigate along Kaub, barge operators can only load about 25 per cent of the maximum capacity at water levels of below 75 cm. Normally water levels are expected to be around 2.5 meters. Most barge operators are not obliged to carry cargo when water levels fall below 80 cm at the Kaub gauge due to an increased risk of grounding the ships.

Figure 01: Water levels at gauge in Kaub (Germany) in cm Source: German Waterway Administration

On the lower Rhine section, barge navigation has also been severely impacted between the northwestern European seaports of Rotterdam and Antwerp and inland river ports in the Dusseldorf-Cologne area. Some sources report that most barges are only able to reach the Port of Duisburg, the largest inland river port in Europe, with some services running up to terminals in Krefeld and Neuss on an irregular basis. Although shipping is still possible on the lower Rhine stretch, loading capacities have been reduced to about 20 percent of the maximum capacity, requiring barge operators to use a larger number of vessels to transport the same amount of cargo or cancel services to some destinations. Due to the increased operating costs and limited capacity, barge freight rates have risen sharply, with some barge operators introducing low water surcharges of up to EUR 625 per container on the Rotterdam-Antwerp to Duisburg area. Before shipping was halted between Kaub and Basel, low water surcharges were said to have amounted to EUR 900.

Reduced barge loading capacities on the Rhine have subsequently put pressure on road and rail freight as alternative modes of transportation. Some intermodal operators have set up so-called “land bridges” to carry cargo and containers between different terminals by truck and rail instead of barges. German intermodal specialist Contargo GmbH advised its customers that it now runs two land bridges to circumvent the shipping halt on the middle and upper stretches of the Rhine. One land bridge using trucking services connects the intermodal terminal in Neuss near Dusseldorf with terminals in southwestern Germany and Switzerland, such as Basel, Mannheim and Frankfurt. Another land bridge is in service between the southern terminals and Emmerich near the German-Dutch border, where barge navigation to Rotterdam and Antwerp is still possible. Despite limited rail freight capacity, some direct rail services are offered from intermodal terminals in southern and western Germany or Switzerland to terminals on the lower Rhine section or to the northwestern seaports.

As rail and trucking options are generally more expensive, even in times of low demand, transportation costs have risen sharply in the past weeks and months, particularly for ad-hoc bookings and special movements. This has been exacerbated by a persistent shortage of truck drivers in Europe as well as an insufficient number of available railcars. High demand for rail freight in southern Germany has reportedly led to congested terminals in particular at Kornwestheim, Ulm and Munich, causing longer processing times for import and export cargo. As a result, carriers face additional costs such as demurrage and storage fees or additional warehouse labor costs, which are likely to be passed on to customers.

Raw Material Shortage Disrupts Production at Steel, Chemical Plants

In Europe, supply chains from chemical to metallurgy and power production rely on barge transportation on the Rhine to receive large quantities of raw materials for the production of steel or chemical products. These intermediate goods are then used for the manufacturing of finished products in downstream industries from automotive to pharmaceutical. Production has reportedly been impacted at major companies along the Rhine including steel makers ArcelorMittal and Thyssenkrupp as well chemical manufacturers Solvay, BASF and Ineos Phenol.

On October 19, Essen-based Thyssenkrupp first declared force majeure, i.e. the inability to honor agreed deliveries to customers, on its steel products from Duisburg and Essen as the company was unable to secure its supply of raw materials. A few days later, ArcelorMittal, the world’s largest steel producer, declared force majeure on October 22 for its Duisburg-Ruhrort site. Steel mills generally receive inputs such as iron ore, coking coal and slabs from the Port of Rotterdam and Antwerp, which are then shipped to production facilities on the Rhine.

Further up the Rhine, chemical producer BASF which is based in Ludwigshafen then followed by declaring force majeure on its supplies of butac, butanols and methacrylic acid on October 24. A week earlier on October 18, the company had already advised customers that it was unable to deliver orders of acrylate esters. Besides a shortage of raw material due to critically low water levels, its production was also impacted by a shortage of cooling water that BASF is usually allowed to take from the Rhine.

Similarly, Belgian chemical manufacturer Solvay has experienced production issues at its Chalampé, Lyon and Valence plants in France due to low water levels on the Rhine since mid-August. The company announced that it was lacking raw material supplies and may not be able to honor customer orders for intermediates required for the company’s nylon and isocyanate chains, including adiponitrile (ADN), hexamethylene diamine (HMD), nylon salt and adipic acid (AA) as well as certain polyamide (PA) resins, fibers and compounds. In mid-October, the company reiterated that production levels of HMD and AA were particularly affected as inbound shipments of raw materials via barge to its Chalampé plant were halted. No force majeure has been declared so far though.

On October 30, industry sources also reported that petrochemical manufacturer Ineos Phenol GmbH has declared a force majeure on acetone and phenol supplies from its plants in Gladbeck, Germany, and Antwerp, Belgium. The company attributed the situation to low water levels on the Rhine and production outages at two of its suppliers, indicating ripple effects through chemical supply chains in Europe.

Other industries and companies experiencing production issues to various degrees due to the low water levels on the Rhine include:

  • Energy provider RWE, which struggles to supply its power plant in Hamm with coal
  • Specialty chemical producer Lanxess which has chartered more ships to receive raw materials at itsCologne plant
  • Chemical company Evonik, which has reduced production at its plant in Lülsdorf
  • PVC producer Vestolit which has restricted supplies due to reduced production levels at its Marl plant
  • Chemical companies in the Chempark in Leverkusen, Dormagen and Krefeld-Uerdingen, includingBayer, Covestro, Lanxess and Ineos, may also experience supply issues. The plants use barge shipping for the supply of coal for power production, salt for chlorine production and Naphta benzine as input for the production of several chemical intermediate products.

Impact on Downstream Manufacturing Supply Chains

The logistical challenges caused by the low water levels are mostly affecting industries relying on barge transportation on the Rhine for inbound deliveries, such as chemical, energy and metallurgy. As this has caused shortages in the availability of supply of intermediate products such as steel parts and chemical materials used across downstream manufacturing industries, customers in the automotive, electronics as well as life sciences and healthcare sectors may face higher prices and even potential production disruptions over the coming weeks and months.

For instance, Thyssenkrupp manufactures steel components to customers in the automotive, household appliances, elevator and wind turbine industries. Most of its customers’ plants are reportedly located within a radius of 500 km around the plants in Duisburg and Essen. Similarly, ArcelorMittal mainly supplies component parts to the automotive industry, but also produces parts for the agricultural and industrial machinery industries.

Chemical materials affected by production outages at BASF reportedly include acrylate esters, butac, butanols and methacrylic acid, which are used for applications in the automotive, plastics, textile and pharmaceutical industries. Similarly, reduced production of phenol products at Ineos’ plants in Gladbeck and Antwerp will likely impact supply and prices for customers in the pharmaceutical, cosmetics and plastics manufacturing industries.

The biggest long-term disruption may, however, result from limited production of nylon products from Solvay’s Chalampé plant, which are particularly significant for the automotive and electronics industries. The location near Strasbourg on the upper section of the Rhine is currently the only location in Europe producing a certain type of nylon, called adiponitrile, that goes into the production of nylon 6.6, a chemical widely used by car makers for applications such as air supply systems, filtration and cooling systems, pedals and door handles. While the nylon 6.6 shortage has existed since 2017 due to a number of force majeures at various producers, the low water situation has recently exacerbated the problem, causing prices to increase by 40 per cent. This has led the French industry association Groupement Plasturgie Automobile (GPA) to warn of an impending global crisis in the car industry due to the shortage of key nylon materials. Automotive plastic part suppliers on a Tier-1 and Tier-2 level may experience a critical shortage of supplies at the start of 2019, a situation that could reportedly cause production halts across the automotive manufacturing supply chain.

Outlook and Recommendations

With no substantial rainfall in sight, water levels on the Rhine are likely to remain critically low until at least mid-November. The subsequent logistical challenges could even extend to spring 2019, according to some sources. Customers can expect higher transportation costs and longer lead times to last over the weeks and months as barge, road and rail capacities continue to be strained by the situation. As most cargo is shifted to railcars, congestion at intermodal terminals may occur and could exacerbate shipment delays.

Alternative supplies of steel and chemical intermediate products should be secured where possible for the coming weeks and months, as production at steel mills and chemical plants is unlikely to fully resume until barge shipping normalizes with higher water levels. Container shipping on the critical Kaub to Basel stretch is likely to gradually resume as the water gauge at Kaub surpasses the 60 cm mark and moves towards the 80 cm mark. As of October 31, the water levels have slightly increased to 55 cm, but are expected to decrease again by November 1.

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