As the situation in the Ukraine continues to worsen in February 2022, it’s clear that whatever direction the crisis takes, the impact on supply chains will be meaningful and potentially devastating.
We have invited experts from across industry to share their initial views on what this might mean and what businesses can do to build resilient supply chains in the face of adversity. In the first of our ‘Ask the Expert’ series, commodities analyst Jason Kaplan examines the Ukraine War, impact of Russian sanctions, potential price spikes around energy and supply disruptions to certain key metals.
What are your initial observations on the implications for the supply chain following the events of recent days?
Jason Kaplan: Disruptions to supply chains and price spikes were to be expected on fears of how widespread the conflict would be. Once the initial shock dissipates, and supply-chains can be assessed for disruptions, I’d expect some prices to return to previous levels. However, damage to the supply of gas or specific metals will persist, bringing strain through supply chains and keeping some prices up.
What lessons of the past could we draw to frame yet another supply chain disruption in a world where supply chains are still fragile?
Jason: The situation is still evolving and unclear, but the 2014 Ukrainian conflict offers a little context on the impacts. While there was an initial hit to supply of commodities from the country, importers adapted and switched to other sources. This was most noticeable with Turkish imports of steel from Ukraine falling, and being replaced by those from Russia and China.
Ukraine is not a significant supplier of hard commodities. In steel, for example, since the annexation of the Crimea in 2014 Ukraine has been the 14th largest producer of steel. However, with the excess global steel capacity, such supply could be compensated for by other regions. Soft commodities will be more of issue, given the importance of Ukrainian wheat and corn to the global market.
It’s a fast-moving situation, but what is your advice to businesses watching this situation and wondering how to mitigate supply chain risk in these uncertain times?
Jason: For now, the progression of the conflict and the goals of the invasion are unclear; as is the response of the countries to the crisis. As with 2014, only sometime after stability has returned will the industrial base be able to adapt and customers understand the implications.
Looking forward, I’d expect raw material and manufacturing in Ukraine would recover a large part, but not all, of its previous level, irrespective of how the crisis develops. However, buyers are likely to be wary of using Ukrainian supply, and so the importance of the country’s supply will diminish further. Also, the destination of these commodities may shift, with China taking a larger share of Ukrainian output for economic and political reasons, especially as China moves away from Australian sources.
More problematic could be supply of downstream products, such as automotive parts. Multinational companies may find they are prohibited from working in or taking product from a country that’s been annexed, hitting Ukrainian production.
The most significant implications are likely due to the effect of sanctions on Russia. Russian commodities and products are embedded into global supply chains and sanctions could necessitate finding alternative sources. Add in the effect of supply-chains that have been damaged by the last 24-months of Covid-19, and it could lead to unavoidable problems for companies with limited supply options or for those which are unsure of the providence of their supply.
Finally, what price spikes and market trends should we be keeping an eye on over the coming weeks and months?
Jason: The big worry for Europe has to be energy. Gas prices were already elevated, putting pressure on consumer spending and raising manufacturing costs. Any restrictions on Russian gas supplies – which accounted for ~40% of EU gas imports in 2021 – will undoubtedly lead to higher energy costs, bringing higher inflation and economic damage, which is a real concern.
Ferrous commodities, like steel and iron ore, should be of less concern. Global capacity is sufficient, even excessive, and sources can be shuffled to compensate. Though, supply-chains may still need time to adapt.
What is more concerning for supply chains are sanctions on Russia. Besides energy commodities, Russia is a prime supplier of metals, like nickel and platinum. Trade financing is already an issue, as some institutes are reticent to provide financing for Russian trade, so making exporting more difficult and costly. The decision to block some Russian banks from the SWIFT payment system further hampers the ability for companies to conduct business across Russian borders – even with friendly countries like China.
It is too early to analyse the effect of the crisis. A lot will depend on the ability of supply chains to adapt, what sanctions are imposed and the economic impact of the crisis.
If you’re concerned about the impact of this crisis on your business, get in touch to talk with our team of experts.
