Why consistency, not cost is now the strongest supply chain link
I recently wrote about ‘The world’s conflict/ commodities conundrum’ when tensions were beginning to escalate between Russia and Ukraine. Here we are just a couple of weeks later and those tensions have boiled over into Russian bombings of Ukrainian military targets and army vehicles crossing the border. By the time you read this, the situation may well have intensified. Aside from the political and humanitarian consequences that may lie ahead, there are some extremely serious supply chain implications unfolding.
Far-flung, low cost
For a long time, cost has been the driving force behind global supply chains – with far-flung, but low cost regions being the manufacturers and producers of choice for our goods, great and small. The pandemic disrupted these networks; some irrevocably. As the world’s collective factories ground to a halt, cost was forced to take a back seat – overtaken by the need to get hold of the supplies in the first place – as the likes of Apple, Samsung, Toyota (and a list much longer than that) know only too well.
Back to the armed clash on Europe’s borders and even before the Kremlin ordered troops into Ukraine’s territories, gas prices had already been pushed up – as sanctions and uncertainty loomed. As the New York Times puts it: “An outright attack by Russian troops could cause dizzying spikes in energy and food prices and fuel inflation fears.” Europe gets nearly 40 percent of its natural gas and 25 percent of its oil from Russia, and is likely to be “walloped with spikes in heating and gas bills, which are already soaring”.
What’s more, in response to Russia’s actions, Germany has halted the approval of a key Russian gas pipeline, Nord Stream 2. The $11 billion pipeline – running beneath the Baltic Sea – would double the volume of gas sent directly from Russia to Germany. The latest sanctions have clearly left that scenario hanging in the balance.
‘Breadbasket of the Soviet Union’
But, the impact on energy is not the only ramification. Food prices are at their highest level in more than a decade, according to the United Nations. Mostly, due to the pandemic. However, Russia is the world’s top wheat exporter. With Ukraine – once nicknamed the ‘breadbasket of the Soviet Union’ – they both account for roughly 29% of the global wheat export market.
Then there’s the possibility of shortages of essential metals – like palladium, aluminium and nickel; supplies that are already reeling from the pandemic. As I mentioned in my previous blog, Russia has rich metal deposits – such as palladium and zinc. It controls approximately 10% of global copper reserves. Copper is extensively used in electronics manufacturing and constructions. Russia is also a major producer of nickel – a key raw material used in electric vehicle batteries. Prices are, understandably, jumpy.
Russia is also an exporter of the three EU Critical Raw Materials (CRMs) we are investigating in southern Norway: phosphate, vanadium and titanium. When it comes to the latter, the Ukrainian-Russian conflict could have significant repercussions for aerospace supply chains – particularly for Boeing. Russia’s VSMPO-AVISMA Corporation is the biggest supplier of titanium and titanium parts for all Boeing aircraft programmes. Sanctions against Russia could, therefore, hit Boeing hard. It’ll need to diversify its supply chain quickly; a daunting task. Interestingly, Airbus and its partners (Safran, and Tikehau Ace Capital) are in the process of acquiring a 100% stake in Aubert & Duval – a strategic supplier of critical parts and materials for the aerospace, defence and nuclear industries. This will help Airbus with the future supply of materials needed for its aircrafts and engines – security Boeing is no doubt yearning for right now. And yet, the paradox for Airbus is that Aubert & Duval will still need to source titanium from upstream suppliers.
Pertinent supply chain questions:
In light of the current precariousness of global supply chain security, here are some poignant questions all countries need to consider (I’ve borrrowed the top three from a relevant Forbes article):
- Should any of us be reliant on a single supplier based halfway round the world for key raw materials or products?
- Should there be a rethink about the benefits of on-shore and near-shore sourcing strategies for manufacturing locations to better respond to demand fluctuations?
- How can collaboration between suppliers, logistics providers, manufacturers and other trading partners be improved, so relationships are less disparate?
- And importantly, how can vertical integration – where different stages of production are controlled and operated by one organisation – help regions weather any future supply chain shocks?
To say supply chains emanating from Russia are becoming strained, is an understatement. As I’ve mentioned, food, energy and metals supplies may all be affected by the recent stand-off between Russia and Ukraine. The challenge many countries now face, as they did during the Covid-19 disruption, is how to pivot and future-proof so access to commodities and critical raw materials is better guaranteed. Consistency, not cost, needs to fuel our global supply chains – and fast.