• Cargoful Team

Supply Chain disruptions following Russia's invasion of Ukraine

Supply chains were already in disarray because of the Covid-19 pandemic, resulting in price inflation, massive shortages, and disruptions. Now, the Ukraine war and the consequent sanctions against Russia may significantly worsen the situation. As Tim Uy, Moody’s Analytics' economist, declared, the greatest risk facing global supply chains "has shifted" from the pandemic to this new reality with increased geopolitical and economic uncertainties, heavily impacting the global Supply Chain.

In fact, Russia is one of the biggest exporters of oil, natural gas, palladium and wheat, while Ukraine is also a major exporter of wheat as well as neon. The war has led and will lead to difficulties in the availability of these commodities and to a simultaneous increase in prices, with heavy consequences on companies and consumers.

Just to give an idea of the impact we are talking about, Forbes estimates that 374.000 businesses rely on Russian suppliers while about 241.000 businesses rely on Ukrainian suppliers.

Wheat, metals and gas: the commodities crisis

The supply-chain disruptions caused by the war hit many industries such as agriculture, manufacturing, energy and automotive. Let’s analyze each of them in more detail to fully understand how these sectors are affected by the war.

Agriculture disruption: wheat

According to Reuters, Russia and Ukraine export 29% of global wheat, in addition to about 20% of corn sales and 80% of sunflower oil. For this reason, the agricultural sector must counter the dramatic rise in wheat prices, reaching its 14-year peak, raising the risk of severe food shortages and hunger in some regions of the globe.

To face this situation, several nations have increased their stocks of imported wheat expanding their own production following the closure of ports in Ukraine and disruption to supplies from Russia. Saudi Arabia, for example, approved an exceptional increase in its local wheat procurement price to boost domestic production. Others, like Kenya, are trying to modernise their reserve system in order to extend stocks' storage time.

Manufacturing disruption: semiconductors

The war also affects important metals’ prices and availability. Russia and Ukraine lead the global production of metals such as aluminum, nickel, copper and iron ore, and are the main suppliers of metals for Europe. In particular, as Moody’s reported, Russia supplies 40% of the world's palladium, a key resource used in the production of semiconductors, while Ukraine produces 70% of the world's neon, a gas used in making computer chips. The problems in the production of chips are the most worrying, because alternative sources to neon are not readily available which implies relevant risks for automakers, electronics companies, phone makers and other industries. During the war in Crimea (2014-2015), neon and chip prices skyrocketed, now this trend is visible again, and even if chipmakers have stockpiled resources, those inventories will hardly last long enough to avoid dramatic consequences to the cited sectors.

Energy disruption: oil and gas

According to Forbes, approximately 41% of Europe’s natural gas supply comes from Russia while the US doesn't import any Russian gas. Therefore, Europe and mainly Germany and Italy may now face the worst consequences. Alternatives to Russian gas exist, but ramping them up will likely not be fast or easy. One quick alternative source of natural gas could be liquified natural gas (LNG) imported from the US, Qatar or Australia. About renewable energy, experts agree that renewables will take time to roll out, so, in the short term, this will be the solution. What could make a difference, in fact, is "fuel switching", e.g., by (re)opening coal plants, as Italy and Germany are thinking to do in case of emergency. The disruption of the Supply Chain will likely imply higher gas bills for both consumers and companies.

Among the energy-related Supply Chain disruptions, oil represents one of the most pressing matters, especially in the transportation sector. Russia is the third-largest oil producer in the world, after the United States and Saudi Arabia. Due to the war, oil prices have reached their maximum in 14 years, and as a consequence, the cost of marine fuel, diesel and gasoline will also increase by a similar amount. Among other oil companies, Shell and BP have halted the purchase of oil and gas from Russia but it is still unclear how much and when this decision will reduce the volatility of oil prices and what to expect as the "new" price level for the coming months. On March 8th, Joe Biden announced the banning of oil from Russia, causing another pick in oil prices. However, governments are reacting to shield consumers, at least for a short period of time. In Italy, for example, the government has recently announced and implemented the cut of some of the excise duties on petrol for 30 days, and both businesses and consumers have rushed to the oil stations.

All those things will leave logistics companies facing another massive hit in their pocket, right after the Covid-19 pandemic, which will probably bring extra costs to consumers, decreasing their purchasing power. According to the American Transportation Research Institute's November 2019 report, fuel is the second-largest expense for a fleet, after drivers’ wages, representing about 25% of a truck's expenses. It is quite clear that small and medium carriers - which cannot hedge against fuel price surge as the big carriers can - will face increased pressure to protect margins. So what are possible counter-measures to address this situation?

Dealing with supply-chain disruption

The tragedy of the Ukraine war is impacting lots of sectors, with some companies about to close down and others not currently carrying out their production activities.

In this case, technology can be a very valuable source of help for logistics companies. One of the most notable examples to cut Operations costs, in fact, is using technology to minimize the kilometers traveled, hence reducing variable costs (such as fuel, tolls, etc), and increasing the resources utilization. This can be done through planning optimization, one of Cargoful solution's main features. Moreover, the freed resources, in terms of vehicles and drivers as well as the time spent by planning managers, can be re-allocated to grow and expand the business - which is an upside and can represent a competitive advantage in times of supply-chain crisis.

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