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The Impact of War on Disrupted Supply Chains

Category: Trade
On May 6, 2022

As the Ukraine conflict intensifies, price volatility, rising inflation, and supply shortages pose a ripple effect across Europe, Asia, and the global economy.

After thirty years of growing economic interdependence among nations, global trade now faces a striking reversal.

Businesses, especially SMEs, need to realise the impact that this will have on their profit and operations:

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The Risk of Deglobalisation

The escalating Russia-Ukraine war and sanctions imposed by a group of western countries have taken a toll on the global supply chain.

With nearly 300,000 companies in the US and Europe having suppliers in Russia and Ukraine, the economies are highly interconnected.

The shipping industry –and logistics at large- has faced a massive hit.

Many western nations have closed their airspace to Russian aircraft. Tit-for-tat retaliation has resulted in similar restrictions by Russia.

Manufactured goods normally air-freighted from Asia are now being re-routed with longer delivery schedules and even higher costs.

The US-China trade deal has already put pressure on global trade, and this conflict adds to the pressure.

The ambitious, trillion-dollar Belt-and-Road Initiative that recently started carrying large volumes of goods from Asia is also likely to lose traction, as Russia and Ukraine are vital links in the chain.

Global supply chains may witness a regional shift due to these disruptions and geopolitical conditions.

As a result, many businesses may pull back from international markets and only operate closer to home in the future.

Rising Commodity Prices

The war’s second big adverse impact is its inflationary pressure on commodity prices.

The three major impacted sectors are the biggest Russia and Ukraine export sectors: energy, grain, and metals.

Here’s how.

Energy

Russia is the largest exporter of oil, natural gas, and coal to the EU, comprising nearly 40% of its natural gas imports.

Crude oil and natural gas prices have thus seen a dramatic rise.

While some economies like the US, UK, and Canada have banned Russian oil imports, EU countries like Germany, Poland, and Hungary, are facing difficulties finding alternatives.

Coal is another largely impacted energy commodity, with prices rising drastically since Russia’s invasion.

Although the global economy is shifting towards renewable resources, coal is still a prime fuel for electricity in many developing and emerging economies.

Coal is primarily used in power stations in the Central and Eastern Europe.

Although 70% of Europe’s thermal coal is imported from Russia, the EU (and Japan) have formally declared a ban on Russian coal imports.

While in Asia…

China, India, Japan, and South Korea that heavily rely on Russian coal are now curbing their imports.

The disrupted global coal supply chain is causing electricity prices to rise significantly.

However, this spike in energy commodities is creating new market opportunities for some other economies.

Countries like Saudi Arabia, UAE, and Iraq hold a sizeable spare capacity to produce extra oil, which can compensate for lost supplies while increasing their demand from importers.

Other major coal exporters like Australia and Indonesia are also profiting from these higher prices and shifts in demand.

Grains

The other significant effect is on global food supplies.

Russia is the world’s largest and Ukraine the fifth largest wheat exporter. Nearly one-third of wheat export supplies come from the two countries.

Consequently, wheat prices have hit their peak since the 2008 crisis.

Most Ukrainian grain exported through the Black Sea is no longer operational since Russian warships began heading towards the sea.

This has disrupted a massive 20 million tons of wheat expected to be exported by July 2022, accounting for around 10% of global wheat exports.

Ukraine’s agricultural production faces a shortage of labour, fertilisers, and farming equipment.

The country is expected to experience a 25 – 50% decline in agricultural production for the upcoming season.

Since more than half of wheat is imported to developing nations across Africa, the Middle East, developing Europe, and Central Asia, there is a significant risk of food shortages among poorer countries across these regions.

Metals

Ukraine and Russia account for 7.5% of global iron and steel exports, and are also home to metals like nickel, aluminium, and palladium.

Nickel and aluminium are used in batteries, microchips, and cars, while palladium is used to curb vehicle emissions.

Shortage in nickel caused its price to rise by 35% in the quarter, halting the London Metal Exchange from trading in metal for several days in mid-March.

Neon is another rare metal central to the semiconductor industry experiencing a shortage.

Around half of the world’s neon supply comes from Ukraine. The US utilises more than 90% of it in its chip industry.

The Impact on SMEs

While the size of SMEs allows them to be nimble and work around market problems, they are also vulnerable to sweeping changes.

The Russia-Ukraine conflict is having a dramatic impact on SMEs in several ways:

Cash Flow Pressure

Comprehensive supply chain reviews and stringent requirements by larger companies pressure smaller suppliers.

Lean inventories and just-in-time delivery schedules can no longer form the backbone of an efficient import-export business.

Businesses need to stock buffer inventory to mitigate such market risks and ensure greater supply chain resilience.

Also…

The Freightos Air Index’s China-to-Europe rates climbed more than 80% in late February to $11.36/kg, with some carriers already imposing war risk surcharges.

Meanwhile, tanker rates have seen pricing spikes ranging from 157% to 591%.

Difficulty Accessing Trade Credit Insurance

Since trade credit insurance typically includes a war exclusion clause, there is growing uncertainty over its continuing availability.

Trade credit insurers have been pulling back from insuring goods or services for export to Ukraine and Russia due to the ongoing conflict of early 2022.

The difficulty in accessing trade credit insurance is expected to significantly impact SME importers delivering food, textile and electronics to both countries and those shipping products to the Ukrainian agriculture and Russian energy sectors.

Higher risk of claims, missed payments, and war sanctions have elevated insurance rates – increasing the cost of cross-border shipping.

Timely Payments are Compromised

Key Russian banks have been excluded from the interbank messaging system, SWIFT, which restricts their access to 11,000 banks across 200 countries and territories.

Visa, Mastercard, and American Express issued abroad have suspended operations in Russia.

However, payment cards issued by Russian banks would continue operations, as domestic payments in Russia do not rely on foreign systems.

Payments must go through Russian providers, causing further shipment delays and supply chain disruptions.

Leading to Stagflation

Slower global growth due to Covid-19 has been a growing issue. The Ukraine crisis has only exacerbated this situation.

Increasing inflationary pressures now raise the prospect of stagflation.

A worrying combination of stagnant growth (due to covid measurements) and long-term inflation (due to covid and war) is haunting the global economy, just like the 1970s.

Asset price volatility, supply chain breakdowns and falling confidence are now being met by tighter monetary policies.

It is no surprise that the global supply chain is under severe threat, and SMEs everywhere are forced to tighten their belts.

SME manufacturers thus have an increasing need for liquidity to streamline operations.

Velotrade’s supply chain financing solution is here to help!