Peter Jones, Founder and Director of Prological, discusses how the Russia-Ukraine conflict is affecting global supply chain pressures with respect to energy, air freight, battery production – and more.
As if the global pandemic and trade battles between great powers hadn’t done enough to throw global supply chains into a spin, on 24 February 2022 Russia invaded neighbouring Ukraine which – aside from the immense humanitarian catastrophe that has ensued – added yet another set of complications to the international logistics environment.
As Peter Jones, Founder and Director of Prological, explains, the Russia-Ukraine conflict has knock-on effects that will be felt throughout the world.
“Russia is the second largest oil producer in the world (~12%), and they are also Europe’s single largest gas supplier,” Peter says. “From that perspective, the sanctions against Russia mean that supply is taken away from the rest of the globe. Germany is the is very dependant on Russia for gas (55 per cent comes from Russia) and oil (34 per cent). Robert Habeck, Germany’s Federal Minister for Economic Affairs and Climate Action is scouring the world for alternative supply, but this is neither easy nor quick. Therefore, there has been – and will be for some time – a dramatic increase in energy costs which we will feel in Australia as the impact on German imports increases”
Peter notes that even when formal hostilities come to an end, there is unlikely to be a quick reversion to the status quo ante – and that Russia will probably continue to be isolated by the international community through sanctions mechanisms.
“The flow on effect in energy pricing is easy to understand, simply because global energy demand now far outstrips supply as a result of removing Russian supply out of the global chain,” he says. “Supply chain is one of the world’s biggest consumers of energy – so that has an effect on all things supply chain, and that feeds through to consumer prices.”
GLOBAL SHIPPING & SEAFARERS
In terms of global shipping, at first blush it might seem the Russia-Ukraine conflict will not have a significant impact.
“Russia occupies a bit less than 1.5 per cent of global shipping activity,” Peter says. “And Ukraine’s combined sea based imports and exports amount to 0.4 per cent. So, at that level, their influence over global shipping is not very significant.”
But these numbers do not tell the full story.
“According to the International Chamber of Shipping, Russia supplies 10.5 per cent of the world’s seafarers, and Ukraine ~4 per cent of them,” he notes. “That’s 15 per cent of the global workforce, which is clearly quite significant. The Ukrainian government is heavily leaning on its seafarers to come home so they can be available for the war front. Simultaneously, global shipping lines are under increasing pressure to not be using Russian staff on their ships. In parallel, Concordia Shipping reports increasing difficulty paying their Russian employees due to sanctions against moving money into Russian bank accounts. Therefore, the longer this conflict continues, that pressure on seafarer labour is just going to get higher and higher. That will have a flow-on effect on staffing ships, which could lead us back into a COVID-type environment where we’ll have ships parked up, due to a lack of available teams to actually run them.”
REALIGNMENT OF AGRICULTURAL SUPPLIES
The conflict also has material ramifications for international trade of agricultural products, Peter says.
“Another impact is going to be the global realignment of wheat and sunflower product movements,” he says. “Ukraine is the seventh largest of the world’s wheat producers, while Russia is third biggest. (For context, Australia is No. 13 at just 60 per cent of Ukraine tonnes.) Combined, Russia and Ukraine grow approximately 15 per cent of the world’s wheat. Further, combined they grow 60 per cent of the world’s sunflowers. The impact of these two crops being locked up for a period will impact global food production, manufacturing, and supply chains. Where it does not impact directly, there will be secondary impacts including increased pricing for all food containing wheat or sunflower products. Russia is also the worlds fourth largest nitrogen based fertilizer producer, which in the medium- to long-term could also disrupt food supply chains around the world as yields fall due to global fertilizer shortages.
IMPACT ON AIR FREIGHT
Because, as Peter notes, Ukraine and Russia have now become commercial and airfreight no-fly zones, there is an impact on flight-movements of goods for surrounding areas, particularly Asia-Pacific to Europe, including Australia.
“In some instances, this situation has added up to 1000 nautical miles to routing,” he says. “Planes in some instances must do landings for refuelling where before it would have been a simple direct flight. Lead times are longer because flight times are longer, and the aircraft operators don’t get the same turnaround times with the same fleet, which then adds further capacity constraints to a world where all passenger aircraft are not yet back in the sky.”
In other words, more upward pressure on pricing for a market that was already well under-supplied relative to demand.
AUTOMOTIVE & TECHNOLOGY EFFECTS
Peter notes that Russia is in possession of between 10 and 12 per cent of the globe’s palladium – a metal required to make catalytic converters, a component that goes into every new petrol vehicle in the world. Only South Africa has more, at 85 per cent, making Russia the second largest supplier of this critical element for car manufacturing.
“The repercussions of this over time will flow into the global automotive network,” he says. “The automotive industry is a global apex industry. So, when the automotive industry starts to slow down that has flow-on effects on second- and tertiary-level businesses and supply chains across the globe.”
Ukraine is Europe’s largest manufacturer of automotive wiring harnesses, Peter says. Unable to get raw materials into the country, and unable to run the factories as normal, this will have a significant impact on the European automotive industry and, in turn, the global automotive industry. As just one example, VW has had to close multiple production plants in Germany and reduce production in others while it seeks alternate supply from North Africa and different eastern European countries.
“To return to Russia, it is the world’s largest supplier of neon, which is required to make the etchings on circuit boards,” he says. “This presents another global constraint that impacts everything from phones to vacuum cleaners, cars, and your new laptop.
“Furthermore, Russia is also the largest holder of a few heavy metals that are required to make batteries. As I’ve previously noted in MHD, the speed limit to growth in uptake of electric vehicles (EVs) within the transport industry is the world’s inability to make batteries fast enough. The conflict will cause further delays in the advancement of EVs around the world. And that same effect will be seen with respect to watches, iPhones, and anything else that that operates with a battery.”
WHAT IS TO BE DONE?
Peter says that the problems brought on by the Russia-Ukraine crisis are broad and complex. It is difficult at this stage to make specific recommendations or suggest specific strategies for countering its negative ramifications in Australia.
“At the moment, Prological’s call to action is the same as that for meeting the COVID-challenge,” he says. “The basic message is to understand your secondary and tertiary supply chains, understand your possible ‘single point of failure’ and develop your risk mitigation plans. Build resilience so that you have alternative positions of supply should something disastrous occur. Everyone knows about the headline issues – like energy. But oftentimes firms don’t dig deep enough into all the supply nodes that make up the supply chain of their suppliers. Companies are well advised to look beyond their immediate suppliers and map their secondary and tertiary supplier supply chains – evaluate the risks and ensure you have contingencies which mitigate identified risks.
“Like COVID-19, the Ukraine-Russia conflict will impact global supply chains. Unlike COVID-19, this conflict’s repercussions on Australian/New Zealand businesses will sneak up on us. Prepared businesses will not have many problems, while the unprepared may lose access to critical materials and components.
“If we have learnt anything from the last two years, it is that preparedness and agility enabling accessible options are critical for business continuity.”
Prological can support businesses to map their supply chains, identify risks, and support the development of alternate plans. To discuss your options, get in touch with Prological today.
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