Bloomberg News

Europe’s Clogged Arteries Drive Up Costs and Uncover Bombs

December 16, 2011

(Adds cost comparisons in 15th paragraph, grain shipment delays in 19th paragraph)

Dec. 15 (Bloomberg) -- Germany’s driest November has shrunk Europe’s rivers, creating monthlong delays for oil- and ore- carrying barges while uncovering the continent’s deadly past.

The city of Koblenz evacuated 45,000 residents on Nov. 28 after the Rhine River’s retreat to a 20-year low exposed an unexploded 1.8-ton World War II bomb in 40 centimeters (16 inches) of water. Falling water levels on the Rhine and the Danube are pushing up shipping costs at companies including ArcelorMittal, the world’s biggest steelmaker, and chemical company BASF SE as they turn to road transport or make more barge trips with smaller loads.

“It’s getting worse and worse,” said Milorad Cubrilovic, whose Belgrade, Serbia-based OSA Chartering transports 250,000 metric tons of commodities a year. “This is the lowest Danube in living memory.”

Germany, home to the Danube River’s watershed, had its driest month since recordkeeping began in 1881. The lack of rainfall has pushed the waterway’s level to a 42-year low in Serbia. Record temperatures and depleted water tables along the Danube basin also contributed to the low levels, according the Drought Management Center for Southeastern Europe.

Low water levels on rivers running between Romania’s Black Sea ports and the North Sea of Germany have wreaked havoc on Europe’s freight transport. The droughts, which German Federal Ministry of Education and Research scientists project will worsen in the future because of global warming, helped push up costs of refined fuel products and delayed grain shipments.

Other Paths

OMV AG, central Europe’s biggest oil company, had to find alternatives to river transport, spokesman Sven Pusswald in an e-mail.

“As a result of extremely weak November rainfall and the very low water levels, we had to partially use other transport paths,” he said. The Vienna-based company had to ship oil products from its Schwechat, Austria-based refinery, destined for Hungary downriver, via road.

Transport costs may be boosting prices. Austrian diesel prices are 8 percent lower than in Hungary while gasoline prices are 2 percent below those of their down-river neighbor, according to the Austrian Auto Association and Hungary’s state news agency, MTI.

The shift has “practically wiped out” fuel-merchant margins downriver, said Nebojsa Atanackovic, owner and director of Nafta AD, a Serbian oil-products trader. “Fuel imports to Serbia, including diesel, gasoline and heating oil, are now coming by road and rail, which increases the costs for everyone,” he said.

River to Rail

BASF, the world’s biggest chemical company, has had to switch river-bound freight to rail because of the drought, resulting in higher costs, according to spokesman Hans-Joachim Perrey. “Additional costs have been within a manageable framework,” he said.

Ten European countries share the 2,872-kilometer (1,785- mile) Danube waterway, making it the most international river in the world. The river basin, fed by around 60 other navigable waterways throughout central and southeastern Europe, is home to about 220 million people who rely on it for drinking water, crop irrigation and hydro power.

The European Union has pledged 100 billion euros ($130 billion) toward improving the Danube’s freight infrastructure and helping the region cope with future droughts. Iron ore and steel companies such as Ferrexpo Plc and Voestalpine AG, along with grain distributors Cargill Inc. and Archer-Daniels-Midland Co., have expanded riverway warehousing and shipments.

‘Irreplaceable’ Barges

“Barge trips on the Danube are very important for Voestalpine and are irreplaceable” in the Linz, Austria-based company’s logistics strategy, spokeswoman Monika Primenz said. This year’s low water levels show EU investment is needed to boost transport reliability, she said.

Unlike the Rhine, which plays a central role for German exporters, the Danube “does not fulfill even a fraction of its potential,” said Edgar Martin, central and eastern European director at Infospectrum Ltd., a London-based risk adviser. A barge convoy can carry the equivalent of 400 fully loaded trucks, he said.

At a cost of 10 euros to 15 euros per metric ton, freight shipments by barge are 50 percent cheaper than those sent by rail. Road transport is more than double the price, at 28 euros to 35 euros a metric ton, the U.S.’s Foreign Agricultural Service in Bucharest said in a Dec. 8 note.

Cargo Collapse

Even before the drought, the Danube, which is connected to Germany’s Main and Rhine rivers by canal, was carrying only about 10 percent of its capacity, according to EU estimates. Transport on the river is still recovering from the wars that followed the 1991 breakup of Yugoslavia. Cargo crashed to 20 million tons in 1997 after peaking at about 100 million tons a decade earlier, according to the Danube Commission in Budapest.

“The strategy of the Danube region is to significantly increase volumes and to establish guaranteed draft levels all year round,” said Ferrexpo spokeswoman Ingrid McMahon. “With the exception of periods of exceptionally low water, barging remains well placed from a competitive point of view.”

In addition to importing Ukrainian iron ore into Europe, Ferrexpo operates the Danube’s oldest and biggest barge fleet via its Helogistics subsidiary.

Low river levels forced ArcelorMittal’s Romanian unit to reduce barge loads and find alternate transport routes, according to an e-mailed statement from the company.

Danube Depots

Historically low Danube waters are also affecting grain exports in Hungary, Romania and Serbia, where as much as 70 percent of this year’s corn crop has yet to be shipped, according to the foreign agricultural service report.

Archer Daniels Midland, the world’s biggest grain processor, is expanding its Danube network of storage depots, it said in August. Cargill, the biggest closely held company in the U.S., acquired a 44,000-metric-ton Romanian grain silo in September.

“In the past month we have loaded one or two ships as opposed to the normal average of 100-120 ships per month,” said Jozsef Vass, the main dispatcher of the Budapest Danube Port. “Ships simply can’t reach us, which is very bad news seeing how this is the main season for shipping agricultural products following the autumn harvest.”

Whether investment in Europe’s rivers pays off may hinge on the world’s ability to arrest climate change, according to the International Association of Danube Research. Projections show “a reduction of the water availability in the range of 5 percent to 35 percent,” in the next half century, the association said in May, citing a University of Munich Danube- climate model. “Navigation will be limited during low flow situations.”

Black Sea

The number of barges passing through the Romanian port of Constanta, connecting Europe’s river networks to the Black Sea, dropped 6 percent from a year earlier in November, according to the port operator. Traffic plunged by one-fourth when the effects of the drought began emerging four months ago.

In neighboring Bulgaria, 60 ships were stranded and 10 ran aground during September, said Georgi Georgiev, executive director of the Executive Agency for Exploration and Maintenance of the Danube.

Global warming will “definitely” spark similar crises in the future, said Milivoj Milenkovic, director of the river port in Novi Sad, Serbia’s second-biggest city. In November, the volume of freight that went through the Novi Sad Port was halved to 52,000 tons “and December is going to be worse,” he said.

--With assistance from Edith Balazs in Budapest, Andra Timu in Bucharest, Zoe Schneeweiss in Vienna, Niklas Magnusson in Hamburg, Elizabeth Konstantinova in Sofia, Sheenagh Matthews in Frankfurt and Rudy Ruitenberg in Paris. Editors: Anne Swardson, James Hertling

To contact the reporter on this story: Jonathan Tirone in Vienna at jtirone@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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