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Supply chain disruptions persist following Russia’s invasion of Ukraine

 — 1 minute read

After the pandemic-driven challenges of the past two years, the Ukraine conflict is now dealing more blows to global supply chains. 

The war in Ukraine is set to result in months of further supply chain disruption, dashing hopes that challenges brought on by the pandemic were beginning to fade.

Fidelity director of global equity research & sector investing Fiona O’Neill said that the firm’s latest analyst survey indicated supply chains were still ranked among the biggest concerns.

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“Global supply disruption pales into insignificance compared to the trauma being inflicted on Ukraine’s population, but for corporations, it is the chief day-to-day business challenge created by the war,” she said.

“From titanium supplies for the aerospace industry to aluminium for soft drink cans, manufacturers have been telling our analysts how they are piecing together the second and third-order effects of the war and scrambling to react.”

Ms O’Neill noted that the role of both Russia and Ukraine in global supply chains was primarily commodities driven, with Russia ranking as the world’s second largest exporter of oil and gas.

Additionally, the two countries provide a third of global wheat exports and are major suppliers of important industrial metals, ores, and gases.

Gas flows from Russia to Europe have continued during the conflict and Ms O’Neill said it was difficult to see both how Russia could direct this supply elsewhere and how Europe would be able to avoid rolling blackouts next winter without it.

Ukraine, which accounts for 12 per cent of global wheat exports, is expected to cut exports by at least 7 million tons this year, which Fidelity said raised concerns about immediate supplies.

“Spot power prices continue to put pressure on European metals businesses which are energy intensive. For aluminium, 16 per cent of European capacity is currently offline,” Ms O’Neill said.

“So an underlying market that was already tight on the supply side is vulnerable to further shocks, although we must not forget that eventually, there is likely to be a demand consequence of everything that we are seeing.”

Outside of commodities, Ukraine’s production of wire harnesses for vehicles has also been significantly impacted by the conflict. While some production lines were still delivering, Fidelity said that they were operating at 40 per cent of previous volumes. 

The ongoing chip supply shortage remains the biggest problem for most carmakers according to the firm.

“The disruption caused by the conflict, and by southern China’s new round of COVID-related lockdowns, have pushed lead times for chip production back out beyond where they were even in last year’s crunch,” said Ms O’Neill.

“Notably, Ukraine also produces 90 per cent of the semiconductor-grade neon gas used in the US.”

Vehicle producers and distributors indicated that consumer demand and incoming orders had yet to dip, with one distributor telling Fidelity that they did not expect supply and inventory to normalise before 2023 at the earliest.

Overall, companies said they had anticipated major increases in labour and other production costs prior to the war, but many now expect to revise up the scale of these cost increases.

Availability of metals rather than cost was flagged as a key concern for several manufacturers, including those in the air industry who are facing difficulties in sourcing titanium.

Manufacturers also told Fidelity that they were working on design changes to get around supply bottlenecks but could face further challenges if new components then become unavailable.

“As markets and companies rush to respond to a rapidly changing world order, the entire length of the value chain is coming under scrutiny,” Ms O’Neill said.

“Whether it is historically high input costs such as energy shutting down transportation or manufacturing, or the struggle to obtain key commodities for processes, our analysts continue to engage with firms to establish the scale of the problems they face, and how they are changing their businesses in response.”

Supply chain disruptions persist following Russia’s invasion of Ukraine

After the pandemic-driven challenges of the past two years, the Ukraine conflict is now dealing more blows to global supply chains. 

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Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.

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