Russia – Ukraine Conflict can lead to Commodity shortages and price hikes

As the military conflict between Russia and Ukraine rages, it threatens to disrupt the global supply chain which is recovering from the impact of the COVID-19 pandemic. As Russia bears the brunt of the sanctions imposed by the Western nations on it for Ukraine's invasion, including cutting off many Russian banks from interbank payments system SWIFT, the ongoing conflict can hit the industries which depend on supply of raw materials, especially industrial commodities, from Russia.

All these developments are likely to result in another round of shortages in a world which is gradually recovering from the impact of the pandemic. It can also lead to price hikes at a time when inflation is a major concern for countries all over the world, thereby impacting industries and households at large. Let's take a look at some of the areas which are likely to be hit by the ongoing conflict:

Energy

Many European countries are heavily dependent on Russian energy, particularly gas through several vital pipelines. Even if the conflict comes to an end, there is a possibility that the harsh economic sanctions on Russia would make it very difficult for these countries to be able to import gas.

Global gas reserves are low due to the pandemic and energy prices are already rising sharply, impacting consumers and industry. With gas being an essential input for many supply chains, disruptions to such a fundamental supply will have widespread economic consequences.

Ukraine also has the second-biggest known gas reserves in Europe, apart from Russia's gas reserves in Asia, although largely unexploited. Besides, the conflict can also disrupt Russia's crude oil production in a market where supply is already lagging demand, leading to further rise in prices. This will not only hit the auto industry but also all other major industries as their input costs will go up. On Monday, Brent crude futures were trading 4.3 per cent higher at $102.14 per barrel, while US West Texas Intermediate crude futures were trading 5 per cent higher at $96.17 a barrel.

 

Transport

With global transport already severely disrupted in the aftermath of the pandemic, the war is likely to create further problems. The transport modes likely to be affected are ocean shipping and rail freight. 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. 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.

In addition to the war, many counties are also closing their air space for planes registered in Russia. This is likely to hit aviation sector across the globe.

 

Edible oil

Ukraine alone makes up almost half of exports of sunflower oil. If harvesting and processing is hindered in a war-torn Ukraine, or exports are blocked, importers will struggle to replace supplies.

 In India, with the severe threat of supply disruptions, companies are left with not many options but to consider hiking prices of daily-consumed edible oils within weeks. According to leading edible oil makers in the country, over 70 per cent of India's crude edible oil demand is met through imports. For sunflower oil, the share is even higher.

About 3,80,000 tonnes of sunflower oil shipments from the Black Sea region to India are stuck at ports and with producers, and new purchases have stalled after ports suspended operations following Russia's invasion of Ukraine, news agency Reuters reported on Thursday.

"Russia and Ukraine together account for 90 per cent of sunflower oil requirement. Our country's dependence on sunflower oil is around 15 per cent of all the oils. Things will be as usual if the situation normalises within 7-10 days as the oil importers have an inventory of up to 45 days. But if the crisis continues for 5-10 days more with oil factories remaining closed and no vessel available, then there is some scarcity we may feel in April", Angshu Mallick, Chief Executive Officer and Managing Director of the country's largest edible oil company Adani Wilmar told Business Today.

 Marico Ltd. that markets the popular Saffola brand of edible oils, is already gearing up to effect cost optimisation measures to keep price hikes in control.

 According to Saugata Gupta, MD and CEO of the company, the evolving geopolitical scenario "can flare up the prices of crude oil and other commodities further which will have a cascading impact on raw materials and packing materials.

 

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 manufacturing of other essential raw materials like neon, palladium and platinum. Sanctions on Russia have increased the price of these metals.

The prices of nickel and copper, which are used in manufacturing and building respectively, have 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, disruptions and potential shortages can be expected, threatening to lead to increased prices for many products and services.

  

White goods

White goods like air conditioner and refrigerator are likely to see a price rise due to increase in copper, aluminium, steel and plastic prices, apart from overall inflation.

 In India, this has led companies like Godrej Appliances, Usha International and TV maker Superplastronics to urge consumers to prepone their purchases if they want to save some money.

Eric Braganza, President of apex industry body Consumer Electronics and Appliances Manufacturers Association (CEAMA), told Business Today, "The industry has already seen a price hike at the beginning of January and we expect the increase to be around 5 per cent this quarter due to rise in commodity inflation. Global freight rates had been surging since the initial outbreak of COVID-19. Exorbitant freight costs have the potential to hurt both consumers and the industry."

 

Microchips

 The year 2021 was all about shortage of microchips as the pandemic disrupted supply chains and resulted in a sharp jump in demand for electronic products. While many analysts expected the situation to start easing in 2022, the Russia-Ukraine conflict has dampened that optimism.

Russia and Ukraine are such key exporters of neon, palladium and platinum, all of which are critical for microchip production. About 90 per cent of neon, which is used for chip lithography, originates from Russia, and 60 per cent of this is purified by one company in Odessa. The sanctions on Russia will further hurt industries.

Alternative sources will require long term investments. Chip manufacturers currently hold an excess of two to four weeks' additional inventory, but any prolonged supply disruption caused by the military action will severely impact the production of semiconductors and products dependent on them.

 

Auto

The automobile sector is expected to be hit hard by the war. Rise in oil prices, continued shortage of semiconductors and chips and other rare earth metals is likely to add to the industry's woes. Besides, Ukraine is also home to many companies which manufacture car components for automakers.

 As per a report in The Wall Street Journal, Leoni AG, which supplies wire systems made in Ukraine to European auto companies, has shut its two factories in the country. Consequently,  Volkswagen AG had to shut one of its plants in Germany.

 "Ukraine is not central to our supply chain, but suddenly we discovered that when this part is missing, it is," the publication quoted a Volkswagen spokesman as saying.

 

Global Food security

Global food prices rose sharply during 2021 due to a host of reasons 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.

 Some countries are particularly dependent on grain from Russia and Ukraine. For example, Turkey and Egypt rely on them for almost 70 per cent 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 fertilizers, so trade sanctions could affect production elsewhere.

 Much of Ukraine's corn and wheat are destined for Africa and West Asia, which are heavily reliant on imports for food items. Over 50 per cent of Ukraine's annual corn and wheat shipments head to Africa or the Middle East.

 Global food security is the biggest concern if Ukraine's exports are disturbed. Meanwhile, owing to distance, US wheat amounts to less than 10 per cent of what caters to those regions. Ukraine is aiming to clinch the third spot in wheat and fourth spot in corn this year, but the ranking could be missed due to the crisis with Russia.