Russia's invasion of Ukraine that began a week ago (on 24th February 2022) is setting in motion a set of dire conditions that supply chains are going to face in coming weeks and months. In this post, I reflect on the effect of the crisis on oil prices, energy prices, supplies for product manufacturing, service supplies, food supplies, and metals.
The Brent Crude Oil Continuous Contract Price opened today at $107.34 and is ranging between $106.83-$113.94 at the time of this writing.
This crisis has taken the oil price above $104 for the first time since 2014. As the third-largest oil producer and second-largest oil exporter, Russia exerts power in the oil supply equation. Low levels of inventories, spare capacities, and stockpiling activities are putting upward pressure on the oil price. Addressing this would require sale from alternative sources such as the U.S. Shale, OPEC or Iran.
In addition to transportation costs due to increasing oil prices, transportation is also being affected due to the effect of the crisis on the estimated times of arrivals and pricing. Trade lines from China to North America are exploring various options to manage this crisis. The quantities transported from China to the EU increased in the first half of last year (at 336,500 TEUs, it was more than 44% higher as compared to 2020 and 99% higher than 2019) and this trend was continuing this year. However, these shipments that were transported by rail will now need to use alternative modes (ocean or even more expensive air).
This can cause ocean freight rates to go up by two to three times (from $10,000 per container to more $30,000 per container) and the air freight spot rates and lead times to go up three to four times.
With Russia providing about 35% of the supplies of Europe, energy prices have started to witness an upward tick. Russia has already reduced the supply of natural gas and is potentially going to further reduce the exports as a retaliation to sanctions. Compounding this situation is the fact the almost 10% of the liquefied natural gas flows through pipelines from Ukraine to the European Union; these assets are at risk of being damaged due to the invasion. These rising energy prices will increase the operating costs of various entities in the supply chain, including manufacturing firms, distributors and retailers. Without alternative sources of supplies from places such as U.S. and Qatar, the costs of operations can become very high. The situation is also going to test Russia's ability to withstand the financial impact of reduced supplies to Europe.
There is also an expected impact on supply shortage since a large set of organizations (more than 2000 US firms and more than 1000 European firms) receive their supplies from first-tier suppliers that are located in Russia. Additionally, several companies (more than 450 US firms and more than 200 European firms) also have their first-tier suppliers operating out of Ukraine. Companies located in Russia and Ukraine are also prominently suppliers of services, including software and IT services (13%), consumer services (7%), and trading and distribution services (6%). On the product side, 4% of industrial machinery as well supplies such as oil, gas, steel and metal products are supplied from these two countries. Overall, as compared to other countries such as China, the overall trade impact due to tier-1 supplier disruptions may not be very high, but when tier-2 and tier-3 suppliers are added to the mix, the impact can be substantial since close to 200,000 firms in the US and more than 100,000 firms in Europe have upstream suppliers (tier-3) from these two countries.
Russia is the top wheat exporter, Ukraine is the top exported of rye, barley and is the third largest exported of corn. Given these trade situations, food supplies are expected to get disrupted in coming days.
On the metal commodity front, markets for copper, nickel, platinum and aluminum are expected to be squeezed due to the conflict.
Overall, the supply chain disruption caused by this crisis is just unraveling and will manifest fully in coming weeks and months. Organizations should take necessary steps to reduce the potential impact that the conflict might have on their businesses by proactively taking steps for continuity planning.