Drought Adding Another Layer To Global Economic Crisis

Rhine And Yangtze Rivers Are Drying Up, Disrupting Industry Even Further

To the ongoing supply chain dislocations and energy shocks dragging various national economies down in the world, add one more problem: severe drought.

Record drought is causing important rivers—such as the Rhine River in Germany and the Yangtze River in China—to dry up, stifling the flow of goods and creating new pressures on already broken supply chains.

Will Low Water Levels In The Rhine Shut Down German Production Lines?

The low level of the Rhine River in particular could force German industries to halt production, with no way to either receive raw materials or transport finished goods.

“The ongoing drought and the low water levels threaten the supply security of industry,” said Holger Loesch, deputy head of the BDI business lobby group.

Loesch said shifting cargo from river to train or transport was difficult because of limited rail capacity and a lack of drivers.

“It's only a question of time before facilities in the chemical and steel industry have to be switched off, petroleum and construction materials won't reach their destination, and high-capacity and heavy-goods transports can't be carried out anymore,” he said, adding that this could lead to supply bottlenecks and short-time work might result.

Already some part of the Rhine are so low that even empty river vessels are unable to sail through.

"Empty ships can no longer sail in some cases," Roberto Spranzi, director of the DTG shipping cooperative that operates about 100 cargo vessels on the Rhine, said on Friday.

Drought has the river as much as 1.5 meters (5 feet) below normal levels.

Expected rain in the coming days is forecast to increase levels in the Rhine by 50-to-80 centimetres in the coming days, a spokesperson for the Federal Waterways and Shipping Administration said, adding they would have to climb by 1-1.5 metres to reach levels typical for this time of the year.

The growing impact on German supply and distribution chains comes even as Germany’s Producer Price Index surged yet again, rising a record 37.2% year-on-year in July (5.3% month on month, also a record).

Producer prices -- a leading indicator for inflation -- surged 37.2% on the year, the biggest rise since records began in 1949, the federal statistics office said on Friday. The month-on-month rise, 5.3%, was also the highest on record.

The ongoing drought suggests the price rises are not yet done, with more supply chain pressures still to come.

Drought In China Creating Fresh Energy Shocks

A similarly severe drought in China is already disrupting important industrial regions for that troubled country, as low water levels at several hydroelectric dams is causing a fresh energy crisis in Sichuan province, which is heavily dependent on hydroelectric power.

Sichuan and surrounding areas have been grappling with heat and drought since July, with water levels for the Yangtze River -- China’s largest waterway -- falling to the lowest level for this time of year, according to a report from state-run Xinhua news agency. The southwestern province is heavily dependent on hydropower and also sells river-generated electricity to heavily populated eastern parts of China including Shanghai and Zhejiang.

Already, several companies in Sichuan have had to shutter or curtail production as the province tries to deal with the shortfalls in energy production.

Here are some of the companies impacted by the drought in Sichuan:

• At least three fertilizer companies have curbed production, with Sichuan Lutianhua Co. saying this week’s power outage will lead to 30 million yuan ($4.4 million) of losses, according to company filings

• Aluminum smelter Henan Zhongfu Industry Co. said in a filing that it will halt some production in Sichuan for a week, cutting profit by 78 million yuan

• Leading solar manufacturer Tongwei Co. said it’s received a power rationing notice

The drought is starting to force energy rationing and rolling blackouts in the region.

Power shortages have also prompted several companies in the sprawling Chongqing region bordering Sichuan to say they would suspend production.

Chinese vice premier Han Zheng visited the State Grid Corporation on Wednesday and said further efforts were needed to ensure power supply for residents and key industries, and to prevent power cuts, according to a state media report.

The drought is also impacting the flow of goods along the economically vital Yangtze River, with low water levels throttling or even stopping shipping at some points.

Low water levels in rivers also forced halts to cargo shipments.

A canal that connects Wuhan on the Yangtze with the city of Anqing to the northeast in Anhui was closed because it was too shallow for vessels to move safely, the Shanghai news outlet The Paper reported.

Fresh Supply Side Shocks Mean New Inflationary Pressures

All things being equal, a single shock to the supply of goods and services would have a reasonably transitory impact on inflation, as the accompanying uptick in prices moderates demand, leading to a new equilibrium price level.

The challenge for the global economy is that all things are rarely equal, and are certainly not remaining equal throughout the world’s supply chains and distribution pipelines. Fresh disruptions and supply-side stresses are producing a continual upward pressure in prices, creating a constant rise in inflation throughout the world—no region has been immune.

The ongoing droughts throughout the world have reached the point where they can be added to the series of disruptions impacting the supply side of the global economy. Just as prior inflationary pressures are getting digested and resolved, the European and Chinese droughts are creating new ones, which will force inflation even higher in the months ahead.