The Supply Chain Impacts of the Russian Attack on the Ukraine

As we all sit and watch the tragedy unfolding on our television screens, everyone can agree that this unprovoked war is leading to a terrible loss of life and destruction of civilian homes and lives.  But there is another deadly impact as well….Russia’s invasion of Ukraine is piling new troubles onto the world’s already battered supply chains. The fighting has shut down car factories in Germany that rely on made-in-Ukraine components and hit supplies for the steel industry as far as Japan. It has severed airways and land routes that had become crucial since the pandemic began gumming up sea trade. The conflict is also bottling up Ukraine and Russia’s vast commodity exports, sending the price of oil, natural gas, wheat and sunflower oil rocketing. Shipping from Ukrainian ports, an important corridor for grain, metal and Russian oil shipments to the rest of the world, has all but ceased.

The impact of the Russian attack will lead to even further supply chain problems, beyond the ones that we have discussed in this blog to date.  Here are just a few issues that occur when a major country like Russia instigates a war against another country.

Semiconductors:  As if the semiconductor shortage wasn’t bad enough before the Russian invasion, it is about to get much worse.  Few people realized that Russia supplies over 40 per cent of the world’s supply of palladium and produces 70 per cent of the global supply of neon.  Although there are inventories of these minerals on hand, the industry is struggling to keep up with current demand, which is rising significantly, meaning the global chip shortage will continue to get worse.  Without inputs, capacity and production will be further constrained, leading to even longer leadtimes and more shortages.

Oil, gas, and transportation: Europe is the primary recipient of Russian oil and natural gas. Russia holds about  12 per cent of the world’s oil supply and 17 per cent of its natural gas.  The US gets the vast majority of its imported crude oil from Canada (4 million barrels per day), Mexico (492,000 barrels per day) and Middle East oil giants like Saudi Arabia and Iraq (a combined 695,000 barrels per day).   But that doesn’t mean we aren’t impacted.  Oil is a global commodity, and rises and falls with the supply and demand activity of a market.  Take away a tenth of the world’s supply and it is going to up – as high as $139/bbl this week.  But it is all over the place, and the market is confused.  For instance, the United Arab Emirates had appeared to push members of the Opec producer group to raise output, only for the UAE’s energy minister to quash hopes. Despite the mixed messages coming out from the UAE, there is a broad consensus within Opec+ that there is no immediate need to boost oil production faster. The price fell by 17%, then went up more than 5% on Wednesday!   US President Joe Biden and other leaders have pledged to try to ease the price pressures for households. Officials from the US have been in talks with oil producers aimed at boosting supply.  Biden is even talking to Venezuela!

Transportation:  As oil prices go up, prices at the pump goes up as well.  This leads to the dreaded “fuel surcharges”, as drivers need to add these costs to their revenues.  Those who don’t keep up, could even end up in bankruptcy, given the rapid rise in prices.  When transportation costs go up – everything else goes up:  groceries, appliances, furniture, you name it.  And so inflation continues to rise.But Todd Amen, the president of trucking financial advisory firm ATBS, said the trucking market is so strong now that he believes carriers will be able to secure rates high enough to offset the rising cost of diesel. “We’ve never been in a market like this before, with this kind of power to pass those costs on.”  In other words, transportation costs were high before the war, simply due to high demand.  These rates won’t be going down soon.

Wheat:  According to agricultural experts, the decrease in Ukraine’s wheat exports affects the global availability of wheat, which puts an upward pressure on the global price of wheat. As financial markets do not like uncertainty over supply, they priced that risk premium in the futures markets already, making wheat futures contract prices increase over 40% in a week. Wheat prices reached a 14-year high on Friday, with Chicago futures for grain closing 41% higher than the previous week at $12.09. This is a massive increase.  Even though wheat is not growing right now, all planted winter wheat (which is still in the ground) might not be harvested in Ukraine due to the conflict if it continues into the summer, which would tighten next year’s wheat supply. This would impact global wheat prices for another year.  The Ukraine has been called “Europe’s bread basket”, and since wheat is also a global commodity, this will impact everyone.  Not only will it impact the price of bread and restaurant food here in the US, but could lead to starvation and humanitarian crises in Africa, where people cannot afford even a small increase in the price of food.

Fertilizer:  Russia exports nearly 13% of the world’s fertilizer goods, according to the International Trade Centre. With economic sanctions isolating the Russian economy, supplies destined for the U.S. from Russia are limited.  Prices for fertilizer are already up as much as 98% from a year ago. Two of the key fertilizer forms, including nitrogen-based Urea and the world’s most widely used phosphorus fertilizer, diammonium phosphate, are up nearly 99% and 68% year-over-year respectively, according to data from DOW Jones. Threats to supply cuts and spiking prices have some farmers concerned about hoarding. Fertilizer costs impacts farmers, which impacts all produce, including hay, which is used for feed for cattle and hogs.  So meat prices will also go up.

These supply chain “domino effects” are unlikely to go away soon.  Global markets are in a truly chaotic situation, and may take a year or more to recover.  Stay tuned.