Rhine low water woes to continue into 2019, players fear ‘disastrous’ Q1

(Adds BASF’s CEO, equity analyst commentary in paragraphs 7-13)

LONDON (ICIS)–Water levels on the River Rhine are set to remain at critically low levels well into 2019, with petrochemicals players fearing a “disastrous” situation in the first quarter if the weeks ahead continue to be dry.

Rhine levels at the Kaub gauge station, one of the shallowest points along the river and close to key German industrial facilities, stood on Friday at 38 centimetres (cm), higher than the previous week but still far from the 60cm considered necessary for normal navigation (see bottom graph for the last 48 hours measurements, taken from Germany’s Federal Waterways Agency – BfG).

Financially, several chemicals companies mentioned the Rhine water levels in their third-quarter results presentations and sources have said logistical costs for their companies have risen as much as fourfold.

Moreover, the crisis has already touched chemicals and fertilizers products that are not transported on the Rhine, but are suffering the side effects of tighter availability of rail and road transport, the latter aggravated by a shortage of truck drivers as well.

While the Rhine is not a river that tends to freeze in the winter season, that is precisely another concern added to the list for petrochemicals players: the low water levels, combined with the northeast Europe winter, could easily freeze the water.

As activity in the petrochemicals markets winds down as the year-end approaches, all eyes are now turning to 2019.

Germany’s chemical major BASF, which has declared several force majeures due to the Rhine, already took a €15m hit due to higher logistical costs in the third quarter, according to Peter Spengler, a chemicals equity analyst at Germany’s investment bank DZ Bank.

The analyst went on to say that BASF is expecting a further €50m hit during the current quarter, but added that all eyes are now turning to 2019 and how the uptick in demand during the first quarter could be covered.

DZ Bank’s analyst assumptions come from what BASF’s CEO said at the conference call with bank analysts following the release of the company’s third-quarter financials on 26 October.

At the time, Martin Brudermuller said that if dry conditions remained through the fourth quarter the impact could be severe, although he referred to Germany’s “normal” weather patterns during the autumn to assume that the situation could quickly improve.

“If you want to have an assumption, if you take worst case, your mid-size double-digit million impact on the earnings is right for Q3. If it continues the whole Q4 like this, it is significantly higher,” said Brudermuller.

“However, it is also relatively normal that in November, latest, it rains in Germany. So, we still think if we look at normal weather patterns – it has been unusual the last months – if we think in that direction, it basically can come down and normalise relatively quickly, even within days.”

While the situation on the Rhine has not markedly improved in a matter of days since that conference call, the situation has somewhat been eased by seasonal factors.

As the year-end approaches, European petrochemicals markets slow down activity and, with December’s public holidays across the continent, the month is shorter in terms of working days.

The Rhine’s water comes mostly from the Alps once winter snowfall starts melting – according to numerous sources, nothing is set to improve until at least March or April.

If the winter season ahead is dry, with lower-than-average snowfall, then the difficulties heading into 2019 would be guaranteed.

A source from a European petrochemicals major said that “biggest test is yet to come” as the already-stressed rail tank cars (RTC) market may struggle to cope with the traditional uptick in demand in the first quarter.

“Truck companies are already warning European chemical producers of higher prices next year because of this,” the source added.

“The Rhine is not only [having a] huge impact for the market [currently] … If it’s like this in Q1 it would be disastrous,” said a European seller of methyl methacrylate (MMA) this week.

A few players, however, have described stable costs because they had contracted fixed rates with their barge suppliers, and therefore it would be down to the latter to transport the amounts contracted.

However, for those players who normally hire charter barges, the picture is different, with costs potentially increasing up to fourfold.

“We are certainly impacted by triple or quadruple costs, as we need to get three to four barges to move product rather than one,” said an oxo-alcohols producers.

CRISIS SPREADS TO FERTILIZERS
While sulphur would not be a product normally transported along the Rhine, using the rail system instead, the tightening in that transport sub-sector is putting a strain on the key fertilizers market.

Once again, while the agricultural sector is in low season, all eyes are turning to the planting season starting in January/February.

According to a sulphur buyer in Europe, it has been a “real challenge to keep product moving” in the past weeks.

“Overall, I’ve seen that suppliers in the more spot sectors are not getting the volumes they’d planned [for], and that’s tightening further,” the buyer said.

“We’re not on any water restrictions ourselves but … the occupancy of barges is high, so it’s hard to find barges and finding a rail slot is difficult. So those combined effects add up to an overloaded system, and demand is pretty strong.”

Most players know the months ahead will not get any easier, and preferred to adopt a pragmatic take on the situation, rather than “pray for rain” like some players have said they were doing a few weeks back.

This week, a European isopropanol (IPA) trader was more succinct: “We can forget about the River Rhine for now.”

The trader added that for its operations practically only alternative transportation is available – rail or trucks.

“And trucks from Benelux are extremely expensive,” it concluded, referring to the petrocyhemical hub in northwest Europe of Belgium, The Netherlands and Luxembourg.

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Top picture: The Rhine’s Kaub gauge station, at the end of October
Source: Michael Probst/AP/REX/Shutterstock

Focus article by Jonathan Lopez

Additional reporting by Jane Massingham, Caroline Murray, Katherine Sale, Helena Strathearn, Yana Palagacheva, and Mark Victory