Since the end of February, all eyes have been on Russia and Ukraine. The effects of Russia's invasion and subsequent attacks on Ukraine have been devastating – from both a humanitarian and business perspective. Sourcing and procurement professionals, in particular, should brace for inevitable supply chain risks. While it's impossible to predict how, exactly, it all will play out, LevaData does have the data needed to offer some timely and helpful insights.
Direct vs. Indirect Risks
Direct risks involve supply disruptions directly resulting from the impact of the war in Ukraine. This means sites of product, component, or raw material production that could be shut down either by destruction or the inability to operate during a conflict (shut down due to lack of labor, lack of power, lack of inputs).
Indirect risks derive from supply disruptions due to the collateral impact of the war in Ukraine, namely, the extensive economic sanctions being imposed on Russia (including Russian banks and companies), limiting its ability to sell goods and raw materials into the world market.
Categorizing the Effects of This Crisis
In terms of direct or indirect supply chain risks, three key raw materials from Ukraine or Russia may affect global supply chains: neon gas, C4F6 (Hexafluoro-1,3-butadiene), and palladium. All three are used in semiconductor production.
For all three materials, the Taiwanese government, which represents companies that comprise the highest overall foundry capacity globally (including TSMC and UMC), released a statement on February 26th stating that the impact of the war in Ukraine would be minimal for semiconductor supply.
According to the statement by the Cabinet, Taiwanese chip makers use minimal palladium, and neither Ukraine nor Russia is a major source for the little palladium the island does use. Domestic companies also have the ability to refine and "remanufacture" palladium, so there should be no impact, it said.
For neon and C4F6, there are already stocks on the island, and supply chains are diversified, so "the near-term impact is not big," the Cabinet said.
In addition, John Neuffer, Chief Executive of the Semiconductor Industry Association, said in a statement that he, “...doesn't believe there are immediate supply chain risks related to Russia and Ukraine.” But the longer the conflict continues, the more the risk increases, analysts said.
In terms of broader indirect risks, Russia is a major supplier of many raw materials, most notably crude and refined oil. Russia is the world’s third-largest oil producer, supplying 11% of worldwide crude oil in 2020, according to the US Energy Information Administration (chart below):
The threat of potential sanctions on Russian crude and refined oil drove oil prices 30% higher in one week, with Brent crude oil hitting $123/barrel on March 7th. Since then, pricing has eased, but the market remains volatile, reacting to any news on supply – and there is some speculation that it could even hit $200/barrel if the situation worsens.
Higher oil prices have ripple effects throughout the global economy, affecting everything from manufacturing due to higher energy costs, transportation from fuel cost, and input costs (from chemicals that are derived from oil). Worldwide ability to replace the Russian oil supply is limited, especially since the balance between demand and supply was already tight in 2021. Abhi Rajendran of Energy Intelligence, an industry publisher, believes the oil market was undersupplied by some 1M barrels per day (B/D) before the war in Ukraine. The situation is difficult enough that the US is now working on diplomatic solutions to release Venezuelan and Iranian crude into world markets again to mitigate the impact of oil sanctions on the global oil supply. However, whatever is achieved will not bring new supply in the immediate term.
Regarding other raw materials, in 2021, Russia was the 2nd largest world producer of cobalt, platinum, and palladium; 3rd largest world producer of gold, nickel, and aluminum; 4th largest world producer of silver; 5th largest world producer of iron ore; 6th largest world producer of lead; and 9th largest world producer of copper. For instance, since the Ukrainian invasion, the world price of nickel has risen 19% – to a 14-year high of $29,800/metric ton. And for the year so far, it's already up 37%. Palladium is up 57% for the year, and other metals are also experiencing significant price spikes.
Recommended Supply Chain Actions
Clearly, the impact on global supply chains from the Ukrainian war is dynamic and, in many ways, unprecedented given the scale, or potential scale, of economic sanctions on Russia, the world’s 11th largest economy. This issue only adds to an already-stressed situation – coming out of a global pandemic. As such, there is no doubt the additional strains coming from higher material costs/limited supply and disrupted trade routes will further extend lead times and strain margins for specific components and products. This will especially affect those directly impacted by the oil and metals markets. Impact currently seems like it will be more severe for European operations due to reliance on Russian oil and proximity to disrupted trade routes.
For supply chain professionals, Levadata recommends taking the following actions:
- Assess direct and indirect supplier impacts, including downstream impacts from raw material supply that might be coming directly or indirectly from Russia. Assessment includes understanding the current inventory/buffer levels available.
- Ensure suppliers have alternative materials sources identified or already activated and that those suppliers are booking capacity/supply with those sources.
- Focus first on supply assurance, then on pricing. Don’t let pricing derail the supply assurance efforts. Avoid reactive price negotiations – given the fluidity of the situation, tell suppliers you will have those discussions once supply is assured.
- Closely track global events and markets for any sudden developments that could dramatically shift the situation (i.e., expanded sanctions or new sources of supply coming online).
If you need help navigating the complexities and supply chain risks of disruptions like the Russian-Ukrainian crisis, consider working with us. LevaData's integrated supply management platform features revolutionary, AI-powered solutions like Supply Risk Navigator. Our offerings provide the insights and recommendations needed to mitigate and manage unexpected disruptions at all times. Learn more about our platform here, and then get in touch with us to see what we can do for your enterprise.
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