EconomyClimate is a supply chain problem that can’t be...

Climate is a supply chain problem that can’t be ignored

After weeks of scorching heat, it was possible to take a stroll on the parched bed of the Loire river. 

Low water levels in the Danube have forced countries in eastern Europe to start dredging to keep barges moving along the critical waterway. The Rhine, at a key choke point, has fallen below levels that make it uneconomical for many vessels to operate. In terms of the looming challenges, this may simply be the warm up.

The Intergovernmental Panel on Climate Change is clear that extreme weather events, like drought, flooding or powerful storms, will become more common and more severe as the climate changes. The implications for the production, manufacture and distribution of food and goods around the world are almost bafflingly wide-ranging and complex.

Companies’ first concern might be which of their plants, or their suppliers’, are exposed to the rising risks. Governments are focused on the threats to food supply. But this year’s drought highlights the danger that the waterborne infrastructure of global trade itself will dry out or shut down as climate change intensifies.

Examples abound: most of Argentina’s crop exports pass along the Parana river, where water levels have dwindled over several years, disrupting the handling of soyabeans, of which the country is the world’s third largest exporter. Flooding in Malaysia last year damaged the Port Klang, upending supplies of Taiwan-made advanced semiconductors, many of which are packaged there before being shipped globally. Trade on the Rhine, last year also threatened by too much water, is suffering from the second serious drought in five years. In 2018, cargo stopped, knocking 0.4 percentage points off Germany’s fourth-quarter economic growth.

Despite this, says Mark van Koningsveld, professor of ports and waterways at Delft University of Technology, “There has been a lot more attention on the impact of shipping on the climate than on the impact of the climate on shipping.” 

About 80 per cent of global trade is carried at some point by ships, with seaborne trade up nearly threefold in the 30 years to 2020. Changes, climate aside, have made the system more susceptible to disruption. Vessels have become progressively larger, and more difficult and costly to rescue when things go wrong. 

There is also no easy alternative when drought strikes. One inland shipping vessel is the equivalent of about 100 to 150 trucks, so road or rail simply can’t take up the strain. The typical response is partial loading of vessels, or running more journeys with smaller ships.

Not only does this mean a vicious emissions cycle, especially as low water levels mean more resistance and more fuel — it also has effects in cost and congestion terms around the waterways and port system. Plus, it doesn’t always work well: despite best efforts, total cargo volumes dropped about 60 per cent at the peak of the 2018 drought, according to van Koningveld.

The trouble is that “the risk from climate is so distributed across all aspects of the system, it’s hard for specific entities to have the incentive to try to address it,” says Austin Becker, at Rhode Island university, who studies the impact of climate change on the world’s 3,800 coastal ports. Most immediately, a third are in locations prone to tropical storms, where small changes in average storm intensity can translate into large increases in port downtime.

Individual adaptation, such as German chemicals group BASF’s work to develop barges that can handle lower water levels, is likely to hit limits of technical or cost feasibility, say experts, given the scale of the problem. More generally, these weather events tend to be treated as discrete emergencies, rather than as part of a worsening systemic problem. That creates what the UN’s office for disaster risk reduction calls a cycle of disaster-response-recovery-repeat.

The same may be true in the corporate world, already under pressure to insulate supply chains from pandemic-style disruption and overhaul them in the face of rising geopolitical risk. But calls for simpler supply chains could concentrate climate risk. Resilience may come at the expense of efficiency through dual-sourcing, geographic diversity and higher inventory, and require investment in disaster-proofed assets. That beats “delay and pay”, says Patrick Verkooijen, head of the Global Center on Adaptation, who argues that spending on climate resilience stacks up financially at the national and corporate level.

For governments and companies, climate is another supply chain risk that must now be factored in.

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