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Global Supply Chain Crisis – Far From Over

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“Supply chain issues” is now a buzzword that has gone beyond the realm of business into our lives and households. We know holiday gifts might be delayed because of supply chain issues, mobile phones or electric cars are facing essential parts shortages never before imagined, and entire companies’ production and delivery are affected by supply chain issues. Why is this happening, when will it end and what can be done?

Why is There a Supply Chain Problem?

Supply chain problems were prominent during the COVID-19 lockdown amid a “perfect storm” of causes, including shifts in demand, labor shortages and structural factors.

The Russia-Ukraine conflict and COVID-19 lockdowns in China have recently exacerbated the supply chain crisis, affecting supply in certain sectors including consumer goods, metals, food, chemicals and commodities.

Will Supply Chain Bottlenecks Continue?

While there had been signs of easing supply chain disruption earlier in 2022, evolving global factors and geopolitics are causing new risks and pockets of stress.

Potential risk factors include: Further supply chain disruption include a possible rebound in U.S. port congestion; spillover from the Russia-Ukraine conflict at Northern European ports; limitations on airfreight transportation, particularly along the Asia-Europe lane; COVID-19 lockdowns in China; and disruptions to rail freight, including the overland rail link from China to Europe. 

Some sectors are likely to be further implicated in future supply chain issues than others. Russia’s dominant role in global energy, industrial metals and soft commodities supply has already pushed commodity price inflation to the highest levels since around 1960.  

The EU and the U.K. have also banned Russian ships from docking at ports, which poses a significant risk to European supply chains and commodity prices.

Future Supply Chain Issues: Which sectors will get impacted the most? Metals and Mining

So far, most Russian mining companies have not experienced significant logistics disruption during metal export from Russia to Europe.

However, logistical bottlenecks are increasing which have pushed up export costs and are extending delivery times. A high concentration of industrial metal supply relies on Russia, specifically nickel, palladium, platinum, rhodium, aluminum and copper.

Aluminum faces the most significant and immediate disruption risk, as around 60% of Russia’s traditional alumina import requirements are closed off or disrupted. This is because Australia has banned the export of Australian alumina ores and related products to Russia.

In recent years, Australia has accounted for around 20-30% of Russia’s import requirements. Ukraine is the largest exporter of alumina to Russia and operations were suspended in early March. The potential for alumina shortages is an immediate and tangible issue, which could be problematic for supply chains as aluminum is a critical metal used in packaging, transport (automobiles and aerospace), renewable energy infrastructure and wiring.

Russia’s exports of select commodities – historical total volumes (Mt)

Russia exported 412 million metric tons (Mt) of oil and oil products in 2019 and 380 Mt in 2020. Looking at coal, Russia exported 218 Mt in 2019 and 212 in 2020. The other commodities listed (ferrous metals, fertilizers, grain, iron ore) have lower but still significant export volumes between 22 and 41 Mt.

Chemical Supply

For most European chemicals companies, the direct sales and earnings exposure to Russia is low at only around 1-2% of sales. However, the supply of fertilizers is likely to be impacted as Russia is a very significant producer/exporter of potash, with around 18% of global potash production in 2021.

Another 17% of global production in 2021 came from Belarus where the major producer has already declared force majeure. Russia also accounts for roughly 10% of global ammonia production, 20-25% of global ammonia exports and 5% of global urea production.

Low or no supply from Russia combined with high energy prices is likely to result in a significant disruption to the supply of fertilizers in the foreseeable future and the situation has already resulted in price spikes. 

Automotive Sector

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The automotive sector is facing disruption due to rising costs and the availability of nickel, copper, platinum group metals, aluminum and steel products. Escalating Russia risks, complex automotive supply chains and dependence on key metals could make the situation volatile in the coming months. J.P. Morgan Research’s global car production assumptions have been updated from +4% to -1% for the 2022 fiscal year, and from 6% to 7% for the 2023 fiscal year. “

Technology Sector

The industry-wide silicon chip shortage and disruptions related to COVID-19 lockdowns in China have left the technology sector facing renewed supply constraints. For technology giant Apple, the main focus is still on supply despite concerns about inflation affecting consumer purchases and the pausing of sales in Russia, which will impact year-over-year growth by around 150 basis points.

In the first quarter of 2022 Apple saw a 26% quarter-over-quarter drop in product sales, with worse still to come. Apple is expecting the impact on revenue in the second quarter of 2022 to be $4 billion-$8 billion, substantially larger than the loss seen in the first quarter of the year.

Finding a Way Out of Supply Shortages

What would need to happen to solve the ongoing supply chain issues? The solution seems likely to be either an increase in capacity or a fall in demand. “On the capacity side, increased U.S. trucking capacity and reduced working restrictions related to COVID-19 should help” said Samuel Bland, European Transport and Logistics Analyst at J.P. Morgan.

“The shipping fleet is also expected to expand 0 during 2023 and 2024, following a more constrained capacity situation since the COVID-19 pandemic. On airfreight, we expect the recovery in capacity to be linked to the return of commercial airline flying, particularly for inter-continental capacity. On the demand side, we expect the recovery in inventories seen in many importing countries to help.

We also expect some shift in the mix of consumer spending back to discretionary services may help. More generally, increasing pressures on consumer budgets may also force a slowdown in import demand.”

The supply-chain crisis is far from over.

Prepare for at least two more years of high costs. Delivery delays will hit some markets more dramatically. Chip manufacturers have already announced shortage expectations throughout 2023, with lead times growing from 9 to 20+ weeks. Many large players in tech have announced plans to build their own plants or replace chips (as Tesla did) with different technologies. Do not be overly optimistic, though: such plans take a long time – and ports are reeling from a new wave of COVID-19 infections and restrictions.

Explore options around the world.

With China and Western Europe getting hit by new variants and suboptimal vaccination levels, the rest of the world remains to be explored. Options in richer countries, that once seemed too expensive, now may have an edge. Look closer to home rather to what was formerly a more cost-effective source.

With shipping costs 3 times to 10 times what they were two years ago, the incentive is gone. (Even so, air freight is prohibitively expensive, so land access may be the most realistic option where accessible.)

Capacity Expansion.

Not everyone can start building plants at the drop of a hat, like Apple; but many companies can consider adding production lines or partnering with allies (and even competitors) to build or exploit resources. Since the supply chain issues are expected to last a couple more years on the optimistic side, it’s a good idea to explore your options not just in geography, but in partnerships for capacity as well.

Prepare for worse times before the good ones. It’s always a good idea to be prepared, but even more so now. Some ports are already closing again in early December (for instance, Dalian, China, took early measures against an outbreak) and the world is reacting to another potential large-scale lockdown.

Managing Supply Chain Risk with Co-Innovation

SAP has provided cross-industry supply chain solutions for almost five decades and has invested heavily in our ecosystem of partners to address specific needs. A wide range of these cloud solutions from SAP and partners are available on SAP Store, where you can try, buy, and be up and running faster than ever before possible.

And you can be confident in partner solutions that are rigorously validated by SAP for quality and interoperability, with a similar look and feel for usability and fast adoption.

The current global supply chain crisis is a perfect example of why global supply chain management is so important. When one link in the chain breaks down, it can have a ripple effect that disrupts the entire system.

Note: This article received full authorization from Economy Vibe.

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