How the war in Ukraine is affecting global supply chains

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How the war in Ukraine is affecting global supply chains

The unprovoked attack on the Ukrainian people is expected to have a direct impact on already fragile global supply chains. The Ukrainian economy has essentially stopped producing due to the country being at war and, currently, sanctions on imports of oil and gas from Russia are being discussed. As bad as things are now, they are unfortunately likely to get worse, not just for Ukrainian and Russian businesses but for hundreds of thousands of companies all over the world. In fact, the knock-on effects of global dependencies on businesses in the Ukraine region is already starting to be felt.

Covid-19 drove global supply chains to the brink of collapse. It caused shortages, stoppages and sent prices soaring. Now, just as global industry begins to recover from the pandemic, Russia’s invasion of Ukraine threatens to throw those already strained supply chains back into disarray. According to Moody’s Analytics economist Tim Uy, “While the world will be relieved to have seemingly overcome the Omicron variant, a new challenge has emerged where the endgame is not clear.” In fact, as Uy points out, “The greatest risk facing global supply chains has shifted from the pandemic to the Russia-Ukraine military conflict and the geopolitical and economic uncertainties it has created.” According to Dun & Bradstreet, an American company that provides commercial data, analytics and insights, 374,000 businesses worldwide rely on Russian suppliers – 90% of these are based in the US; about 241,000 businesses rely on Ukrainian suppliers and 93% are based in the US.

Which supply chains will be most affected

Russia is a major producer of commodities, everything from oil and natural gas to palladium and wheat. Ukraine is also a major wheat exporter; in 2020, the two countries had a combined total of $11.51 billion in wheat exports. Moody’s also points out that Russia supplies 40% of the world’s palladium, a key resource used in the production of semiconductors. Furthermore, Moody’s said Ukraine produces 70% of the world’s neon, a gas used in making computer chips. The war is creating doubt about the availability of a significant number of these vital resources.

Dun & Bradstreet states that Russia’s war in Ukraine is being felt particularly severely in the following industries, which have few – if any – alternatives from which to source these crucial materials and resources:

Natural gas

Approximately 41% of Europe’s natural gas comes from Russia; an alternative source of natural gas could be liquified natural gas (LNG) imported from the US, Qatar or Nigeria.

Crude oil

Approximately 34% of Europe’s crude oil imports come from Russia; alternative suppliers could be Saudi Arabia, Iraq or the US.

Industrial metals

Russia and Ukraine are global leaders in the production of metals such as aluminum, nickel, copper and iron ore, and are Europe’s main suppliers of these metals; alternate sources could be South America, China or Japan. In an unprecedented move, on March 8th, the Guardian reported that the London Metal Exchange (LME) had canceled all nickel trades that took place on that day, as the price doubled to a record $100,000 per ton.

 Approximately 90% of neon, used for chip lithography, comes from Russia; there are no readily available alternative sources. “We can expect the global chip shortage to worsen should the military conflict persist,” warns Uy.

Agri-commodities

Russia and Ukraine account for more than 25% of the world’s wheat supply, about 20% of corn sales and 80% of sunflower oil exports – in 2019 alone, Ukraine had a total of $3.8 billion in sunflower oil exports; alternative sources for wheat could be the US, Canada or France; alternative sources for corn could be the US, Argentina or Brazil; alternative sources for sunflower oil could be Turkey, the Netherlands or Hungary.

What is the immediate impact likely to be?

Dun & Bradstreet says that the crisis will have the following immediate implications for companies:

  • The potential to dramatically worsen Europe’s energy crisis.
  • The spillover effects of US, UK and EU sanctions on Russian companies will further impair an already struggling global supply chain.
  • Disruption of trade routes and freight costs, as well as inaccessibility to critical raw materials could derail economic growth and add to inflationary pressure.

How to mitigate the risks to global supply chains

According to Dun & Bradstreet’s report, companies need to pursue better understanding: “With the sanctions and diminished access to commodities at hand and supply chain disruption to consider, business leaders would do well to pursue a better understanding – leading to better management – of their supply chains.” In the short-term, this means that companies will have to “rely on alternative suppliers to fill resource gaps in their supply chain.”

Embracing data and technology is also a key factor. Philip Melson, global lead for retail consulting at artificial intelligence company Fractal Analytics, recommends that, “retailers … find a way to embrace data and technology to help them navigate shifts in supply chain capacity so that they can try to find the best value they can… Simply put, retailers need to work very flexibly and remain agile given that the country is in a very dynamic state. Optimal logistics routes will have to be continuously updated as conditions and navigability of roads change on an intraday basis and destinations for inventory and labor will shift based on where the population may be moving as a result of the conflict. Therefore, the best way for retailers to successfully navigate this crisis is to remain on their toes,” Melson is cited in a Forbes article.