The war in Ukraine is threatening
further disruption to already stretched supply chains. Ukraine and Russia may only account for a small proportion of the imports
of major manufacturing nations like Germany and the US, but they are essential
suppliers of raw materials and energy for many crucial supply chains.
Though the
economic consequences of a war that threatens the lives and livelihoods of many
Ukrainians will always be secondary to the looming humanitarian crisis, here
are five areas likely to see trouble ahead:
1. Energy
Many European
countries are heavily dependent on Russian energy, particularly gas through
several vital pipelines, and this may have coloured
their approach to the crisis.
Russian gas
reliance has been suggested as the reason Europe has been reluctant to remove
Russia from the international payments system SWIFT, for example, though it's
worth pointing out that the Germans have indefinitely suspended new Baltic gas
pipeline Nord Stream 2.
While a
complete suspension of Russian gas flows is unlikely at the moment, even small
disruptions will have a significant impact. Global gas reserves are low due to
the pandemic and energy prices are already rising sharply, impacting consumers
and industry.
With gas an
essential input to many supply chains, disruptions to
such a fundamental supply will have widespread economic consequences. When gas
prices first surged in autumn of 2021, for instance, fertiliser
plants in the UK shut down as high energy cost made production untenable. This
led to shortages of carbon dioxide, which is essential for everything from
medical procedures to keeping food fresh. Such consequences are likely to
magnify with rising oil and gas prices.
2. Food
Global food
prices already rose sharply during 2021 due to everything from higher energy
prices to climate change. Food producers are likely to come under further
pressure as prices of key inputs rise now.
Russia and
Ukraine together account for more than a quarter of global wheat exports, while
Ukraine alone makes up almost half of exports of sunflower oil. Both are key
commodities used in many food products. If harvesting and processing is
hindered in a war-torn Ukraine, or exports are blocked, importers will struggle
to replace supplies.
Some countries
are particularly dependent on grain from Russia and Ukraine. For example,
Turkey and Egypt rely on them for almost 70% of their wheat imports. Ukraine is
also the top supplier of corn to China.
Stepping up
production in other parts of the world could help to reduce the impact of
interruptions to food supplies. However, Russia is also a main supplier of key
ingredients for fertilisers, so trade sanctions could affect production
elsewhere.
Meanwhile, we
can also expect diversions to trade flows: China has already said it will begin
importing Russian wheat, for instance.
3. Transport
With global
transport already severely disrupted in the aftermath of the pandemic, a war
could create further problems. The transport modes likely to be affected are
ocean shipping and rail freight.
Since 2011,
regular rail freight links between China and Europe have been established.
Recently, the 50,000th train made the journey. While rail carries only a small
proportion of the total freight between Asia and Europe, it has played a vital
role during recent transport disruptions and is growing steadily.
Trains are now
being rerouted away from Ukraine, and rail freight experts are currently
optimistic that disruptions will be kept to a minimum. However, countries like
Lithuania are expecting to see their rail traffic severely affected by
sanctions against Russia.
Even prior to
the invasion, ship owners started to avoid Black Sea shipping routes, and
insurance providers demanded notification of any such voyages. Although
container shipping in the Black Sea is a relatively niche market on the global
scale, one of the largest container terminals is Odessa.
If this is cut
off by Russian forces, the effects on Ukrainian imports and exports could be
considerable, with potentially drastic humanitarian consequences.
Rising oil
prices due to the war are a worry to shipping more generally. Freight rates are
already extremely high and could rise even further.
There is also a
worry that cyber attacks could target global supply
chains. As trade is highly dependent on online information exchange, this could
have far-reaching consequences if key shipping lines or infrastructure are
targeted. The ripple effects from a supply chain cyber attack
can be enormous.
4. Metals
Russia and
Ukraine lead the global production of metals such as nickel, copper and iron.
They are also largely involved in the export and manufacture of other essential
raw materials like neon, palladium and platinum.
Fears of
sanctions on Russia have increased the price of these metals. With palladium,
for example, the current trading price of almost US$2,700 per ounce, up over
80% since mid-December. Palladium is used for everything from automotive
exhaust systems and mobile phones to dental fillings. The prices of nickel and
copper, which are used in manufacturing and building respectively, have also also been soaring.
The aerospace
industries of the US, Europe and Britain also depend on supplies of titanium
from Russia. Boeing and Airbus have already approached alternative suppliers.
However, the
market share and product base of leading Russian supplier VSMPO-AVISMA make it
impossible to fully diversify away from it, with some of the aerospace
manufacturers having signed long-term supply contracts up to 2028.
For all these
materials, we can expect disruptions and potential shortages, threatening to
lead to increased prices for many products and services.
5. Microchips
Shortages of
microchips were a major problem throughout 2021. Some analysts had been
predicting that this problem would ease in 2022, but recent developments might
dampen such optimism.
As part of the
sanctions towards Russia, the US has been threatening to cut off Russia's
supply of microchips. But this rings hollow when Russia and Ukraine are such
key exporters of neon, palladium and platinum, all of which are critical for
microchip production.
About 90% of
neon, which is used for chip lithography, originates from Russia, and 60% of
this is purified by one company in Odessa. Alternative sources will require
long term investments prior to being able to supply the global market.
Chip
manufacturers currently hold an excess of two to four weeks' additional
inventory, but any prolonged supply disruption caused by military action in
Ukraine will severely impact the production of semiconductors and products
dependent on them, including cars.