Edward Blomstedt

Ukraine crisis: how supply chains have become a global battleground


At Combi Works we have helped companies to restructure their supply chains and digitalize them using the flexible AirFaas system for some years now. Demand is often for more sustainable supply chains, but there are now also political aspects.

As the Ukraine crisis escalates, concern is growing over the potential fallout for the European economy, reports the British Guardian. Further Russian trade sanctions will cause the price of vital supplies of grain and natural gas to rocket, or even cut off supplies at short notice. This would leave Europe, the UK and other areas of the world potentially experiencing power shortages and rising energy and food prices.

European businesses that source raw materials from Ukraine or Russia – or those reliant on products comprising one of these components – should take action now to minimize risk and protect their business. As political change is likely, businesses need to be aware there is a high risk that environmental and other ethical requirements linked to a specific supply contracts could be overlooked.

In 2013, Europe sourced 40% of its natural gas from Russia, along with significant volumes of oil and coal. Germany is by far the largest recipient of Russia’s natural gas and the UK imports considerably less, but the impact of any break in supply would have a major impact across the EU. While Finland and Northern Europe have invested in renewable energy and Finland in nuclear energy, there is still a dependency also on Russian imports. Ukraine is a large global exporter of finished iron products and iron ore, as well as grain such as wheat, corn and barley, and seed oils. A significant proportion of these goods are exported to European countries.

Given Europe’s dependency on these supplies, the sanctions imposed on Russia as retaliation to the war, there will be economic effects from these action for both the EU and Russia. Nevertheless, mounting concern over the potential impact of the crisis could lead to a rise in prices, including hikes in the cost of products from areas that might be able to provide a more stable source.

The global nature of modern supply chains means European businesses cannot assume they are immune to the Ukraine crisis, regardless of what they make or do. The reality is that some companies may only find out that their supply chain is vulnerable to events in Ukraine when suppliers try to pass on a price increase or warn of supply issues. Until then they might not have realized that the seed oil contained in their product was from Ukraine or linked to it.

Breaks in supply are not the only risk; even if supplies appear not to have been affected, it is possible that other factors linked to the delivery of the contract have changed, which could become a reputational issue. Close scrutiny is needed to ensure workers’ rights are protected and environmental criteria are being followed.

As a precautionary step, businesses should audit their supply chain to assess the exposure to the Ukraine crisis. They should also closely monitor global supplies of key products, which is likely to involve tracking commodity exchanges and mapping their supply chains in order to get early warning of market changes. They could consider increasing stock levels of supplies or approving alternative sources early, to give them an extra cushion and enough time to get assurance that new suppliers meet their ethical standards or required commitment to sustainability.

Businesses may be able to locate “hidden” supplies that exist within the global marketplace: supplies that have been stockpiled in the past, for example, and are no longer needed. This strategy proved successful for some electronics manufacturers in the aftermath of the Japanese earthquake and tsunami in 2011, which knocked out global supplies of some silicon chips when plants were forced to shut down.

Some producers were able to keep making goods that required these components because they could locate a source of supply that competitors were not aware of. Other businesses may prefer to design their way around the problem by swapping one component for another or using less of it.

For the heavy industry, steel manufacturing is fairly abundant, but increasing prices should be expected which can further risk the growth that has been shaken by the recent price inflation. The escalating economic sanctions and wide-spread boycotting of Russian companies and products will inevitably have an impact on businesses. In the long-term, it will most likely ensure that Europe takes the necessary steps to reduce dependence on Russian energy, but in the short-term we should expect energy prices to remain high, affecting manufacturing costs around Europe.

Here is a list of implications on supply chains since the start of the war:

  • Material wholesalers have either no material on stock or then they are committed to secure their available material to customers with whom they have legally binding commitments or alternatively secure it for their own semi-finished production (pre-cut pieces) where added value is higher.
  • Steel wholesalers do not provide transparent deliveries – they don’t know when they’ll receive more material and how much
  • Transportation costs are increasing in Europe – VLSFO above 1000 USD
  • Fuel, gas and energy prices increasing day-by-day
  • Additives are rising heavily and steadily – e.g., nickel increased 70% on 7th and again 80% at 8th of March before quotation was suspended in LME
  • Covid situation worsening in China – e.g., reported 500.000 cases. Risk that 0-tolerance policy in China closes container ports again
  • Several ports and shipping lines and not handling or transporting containers to Russia – consequently containers start piling up and shipping lines are moving their ships a way from the Baltic Sea meaning that there are fewer and smaller ships in the Baltic sea leading to a situation that number of routes go down and eventually prices go up.
  • Russian steel is currently “poisonous”, so no-one is willing to take a risk to buy it. This means that big share of material capacity is lost, stocks are empty, availability bad and prices high.
  • Russia and Ukraine have been main source of basic steel and iron ore especially in Eastern Europe – so current situation has made all material inventories empty and prices for available material is 40-50% higher than in February.

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