Conflict between Russia and Ukraine, these five basic commodities may be affected
The conflict between Russia and Ukraine is affecting already strained supply chains. Ukraine and Russia may account for only a small portion of imports by major manufacturing countries such as Germany and the United States, but they are important suppliers of raw materials and energy for many key supply chains. Here are five areas where trouble could arise:
1. Energy
Many European countries are heavily dependent on Russia for energy, especially natural gas through several key pipelines, which may have affected how they responded to the crisis. For example, Russia's reliance on natural gas has been cited as a reason for Europe's reluctance to remove Russia from the international payments system SWIFT, although it is worth pointing out that Germany has suspended the new Baltic gas pipeline Nord Stream 2 indefinitely.
While Russia is unlikely to completely stop gas supplies right now, even a small disruption can have a major impact. Affected by the epidemic, global natural gas reserves are low, and energy prices have risen sharply, affecting consumers and the industry.
Because natural gas is an essential part of many supply chains, disruptions to this essential supply will have wide-ranging economic consequences. For example, when gas prices first surged in autumn 2021, fertiliser plants in the UK closed as high energy costs made production unsustainable. This has led to a shortage of carbon dioxide, which is essential for everything from medical procedures to keeping food fresh. The consequences are likely to be magnified as oil and gas prices rise.
2. Food
In 2021, global food prices have already risen sharply due to factors such as rising energy prices and climate change. Food producers are likely to face further pressure as prices of key raw materials rise.
Russia and Ukraine together account for more than a quarter of global wheat exports, while Ukraine alone accounts for nearly half of sunflower oil exports. Both are key commodities used in many food products. If harvesting and processing are hampered or exports are blocked in war-torn Ukraine, it will be difficult for importers to replenish supplies.
Some countries are particularly dependent on Russia and Ukraine for food. For example, Turkey and Egypt rely on China for nearly 70% of their wheat imports. Ukraine is also China's largest corn supplier.
Increasing production in other parts of the world can help reduce the impact of food supply disruptions. However, Russia is also a major supplier of key raw materials for fertilizers, so trade sanctions could affect production in other countries. At the same time, we can also expect trade flows to divert to other areas: China, for example, has said it will start importing Russian wheat.
3. Transportation
With global transportation already severely disrupted in the wake of the pandemic, a war could create even more problems. Affected modes of transport are sea and rail.
Since 2011, China-Europe regular railway freight has been established. Recently, the 50,000th train completed the journey. While rail transport only accounts for a small fraction of total freight between Asia and Europe, it has played a vital role during the recent disruptions and is growing steadily.
Currently, trains are diverting away from Ukraine, and rail freight experts are optimistic that disruptions to trains will be minimized. However, countries like Lithuania expect their rail traffic to be severely affected by sanctions against Russia.
Even before the conflict, ship owners began avoiding the Black Sea routes, and insurance companies asked ship owners to give advance notice. Although container shipping in the Black Sea is a relatively niche market globally, one of the largest container terminals is Odessa. If this channel is cut off by Russian forces, the impact on Ukraine's imports and exports could be considerable, with potentially serious humanitarian consequences.
The rise in oil prices due to the war is a general concern for shipping. Shipping rates are already very high and may continue to rise.
There is also concern that cyberattacks could target global supply chains. Since trade is highly dependent on the exchange of information online, this could have far-reaching implications if major shipping routes or infrastructure are targeted. The knock-on effects of a supply chain cyberattack can be enormous.
4. Metal
Russia and Ukraine lead the world in production of metals such as nickel, copper and iron. They are also mainly involved in the export and manufacture of other important raw materials such as neon gas, palladium and platinum.
Concerns about Russian sanctions have led to higher prices for these metals. Palladium, for example, is currently trading near $2,700 an ounce, up more than 80% since mid-December. Palladium is widely used in automotive exhaust systems, mobile phones and dental fillings. Prices for nickel and copper, which are used in manufacturing and construction respectively, are also soaring.
The aerospace industries in the United States, Europe and the United Kingdom also depend on Russian titanium supplies. Boeing and Airbus have approached other suppliers. However, the market share and product base of leading Russian supplier VSMPO-AVISMA make it impossible to fully diversify, and some aerospace manufacturers have signed long-term supply contracts until 2028.
For all of these materials, we can expect supply disruptions and potential shortages, which could lead to higher prices for many products and services.
5. Microchips
Chip shortages are a major concern throughout 2021. Some analysts had predicted the problem would ease in 2022, but recent developments could dampen that optimism.
The U.S. has been threatening to cut off Russia's supply of microchips as part of sanctions against Russia. But that sounds hollow when Russia and Ukraine are major exporters of neon signs, palladium and platinum, all of which are key to microchip production.
About 90 percent of the neon lights used in chip lithography are produced in Russia, with 60 percent being purified by a company in Odessa. Alternative energy will require long-term investment to supply global markets.
At present, the inventory of chip companies has exceeded 2 to 4 weeks, but if the Ukrainian military action causes continuous supply interruptions, the production of semiconductor-dependent products such as semiconductors and automobiles will be seriously affected.