Australians are reacting with both a sense of compassion and a sense of helplessness as they watch the Ukraine war events unfold on television and in their daily news feed. And although fellow feeling and commiseration for suffering Ukrainians are paramount, there is another side of the conflict that hits closer to home and cannot be ignored: the effect on the global supply chain.
Supply chain challenges resulting from the Russia-Ukraine war
Depending on which source you read, both central protagonists are major players in the global resources market. Russia and Ukraine are responsible for between a quarter and a third of global wheat production. Russia is also the world’s third-largest oil producer and exporter, accounting for 13% of global oil exports and 9% of gas (including 40% of Europe’s supply). In 2019, Ukraine was the 7th largest world producer of iron ore, the world’s 8th largest producer of manganese, 6th largest producer of titanium, and 7th largest producer worldwide of graphite. It was the world’s 9th largest producer of uranium in 2018. Ukraine supplies about 50% of the world’s neon gas and 40% of its krypton, both of which are needed for the production of semiconductors. It is estimated that over 90% of U.S. semiconductor-grade neon supplies are imported from Ukraine. Ukraine and Russia provide huge chunks of the world’s neon and palladium needs (for semiconductors) as well as the titanium required by the aerospace industry.
Now Ukraine is being prostrated by a hostile invasion, while NATO and other western nations have slapped sanctions on the aggressor, Russia, aimed at restricting the flow of its exports and crippling its economy. Expect, and rightly so, more sanctions to follow.
More specifically, the global supply chain is being severely disrupted by:
Cargo movements at a standstill around the Black Sea
The major Ukrainian port of Odessa is closed, while the port city of Mariupol, on the Sea of Azov (connected to the Black Sea by the Kerch Strait), has been destroyed. Russian forces have closed shipping routes in and out of the Sea of Azov, causing impassable congestion in the Black Sea, already rendered dangerous by reported missile attacks on vessels.
Maritime personnel killed or injured
Seafarers from across the globe are trapped in their vessels, some of them killed or injured during these attacks. Others have abandoned their ships, but struggle to find a way of returning home, or to other ports to find work. Russian and Ukrainian seamen alone account for around 15% of the global shipping workforce.
Airspace over Ukraine is closed. Flights to and from Ukraine have been cancelled, and airlines are also avoiding Russian airspace. Russian air cargo operators are banned from travelling to many countries, reducing the number of planes available globally. A spike in rates for air freight is the unavoidable result of all these disruptions.
The price of fuel for ships, planes and trucks soared as a result of the anticipated ban by the US and UK (and Australia) on Russian oil imports. This comes on top of increased post-pandemic demand for oil, and supply shortfalls from OPEC+, the grouping of the world’s key oil-exporting nations.
Sanctions against Russia causing delays everywhere
Customs authorities at terminals and ports worldwide are spending extra time inspecting shipments in order to identify sanctioned and restricted goods destined for, or originating from, Russia. As a result, all cargo is experiencing delays, not just Russian cargo, and transhipment hubs are experiencing significant congestion.
Increased insurance costs
Unsurprisingly, insurance underwriters are nervous about the volatile situation in Eastern Europe, and have increased their premiums for covering shipments to the region.
Lingering effects of COVID
Some of these pressures may have taken longer to have an impact if international shipping was not already in severe disarray following the COVID-19 pandemic.
All these factors have combined to create a perfect storm for supply chain logistics. The effect will be seen not just overseas, but in Australia as well, with transport and shipping costs skyrocketing, and sourcing of both components and finished goods becoming increasingly difficult.
How Australian businesses can adapt
Every business in Australia will need to adapt to the new reality of a disrupted supply chain, and rising food and energy prices. Procedures can be adopted to mitigate these effects, including:
Develop a specialist response team
You may need to add to or upgrade your logistics team so that they can respond to the crisis in a timely manner, as well as supporting them through any lingering effects of COVID, including isolation and remote working.
Extract as much useful information as possible from past data and projections concerning inventory, likely supply and demand, production and delivery capacity, and possible cost increases.
Create case studies and simulations
Simulated scenarios of what could occur throughout the supply chain process, in the case of shortages or extended delivery times, will provide insights to form the basis of operational decisions.
Use the information and observations to identify specific business areas where demand is likely to exceed supply, or where supply will be delayed, and prioritise these for special attention and effort.
Get a head start – How Australian businesses can find out more
Businesses who take a proactive approach to the likely problems resulting from Russia’s war in Ukraine will fare better than those who simply wait for difficulties to arrive on their doorstep.
Bentleys are a member of Allinial Global, the world’s second largest accounting association. One of our member firms is Schneider Group, a firm with locations throughout the ‘eastern block’. Schneider help foreign firms trying to do business in countries such as Armenia, Austria, Belarus, Germany, Kazakhstan, Poland, Russia, Ukraine and Uzbekistan. They are running webinars each Friday, in English, on sanctions and the implications of these sanctions for foreign businesses.
Contact your local Bentleys office to find out how we can help you to prepare best if you are impacted, how you can help, and how you can navigate these challenging times.
Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.