Four Ways the Russia-Ukraine War Affects Manufacturers

Russia’s invasion in the Ukraine sent shockwaves through democracies around the world. Its impact on manufacturers is also expected to be dramatic. Here are 4 key ways that manufacturers will feel the effects:

#1: Increasing energy prices will make manufacturing more expensive

Russia is the third-largest producer of oil worldwide, according to Statista. It produces approximately 1 out every 10 (12%) barrels of oil globally and supplied about 43% of Europe’s extra gas imports in 2020. While Western sanctions have so far allowed the flow of fossil fuels from Russia to continue, the conflict has led to dramatic price spikes over concerns about supply availability in the months ahead.

“I will do everything in my power to limit the pain the American people are feeling at the gas pump,” said US President Joe Biden in a special statement on the conflict, adding that he is coordinating with major oil producing countries to secure global energy supplies and will release additional barrels of oil from the US strategic reserves as needed.

The high cost of oil and gas will make the cost of energy to drive key manufacturing processes more expensive and drive global inflationary pressure.

#2: Supply chain challenges to get worse

Land-based supply routes between Europe and China typically transit by train via “new silk road” corridors. These routes have been rapidly increasing in volumes in recent years, providing a vital connection between China and the West.

According to trans.info the average train load along these routes were 60% higher in the first half of 2021 than the equivalent period in 2017 and average number of trains dispatched per day has also increased.  Some of these routes transit through Russia and concerns about the ongoing efficiency and availability of these networks is putting pressure on alternative routes leading to price increases.

Supply chain visibility platform FourKites reports ocean freight prices have more than quadrupled in recent weeks. “Two years ago, container rates for shipments from Shanghai to Rotterdam were less than $2,000. In recent weeks, drury freight indexes showed spot container rates climbing to $13,000 for the same route. Shortly after the invasion, some freight forwarders showed rates at $54,000 for a single container.”

Some manufacturers operating within Russia are being forced to halt or scale back production. Toyota Motor Corporation, for instance, today announced that it would be halting operations in Russia because of “supply chain challenges”. Toyota’s plant in St Petersburg employs around 2,000 people and produces around 80,000 vehicles annually.

Additionally, thousands of US and European firms have key suppliers in Russia and the Ukraine. According to data from Interos, a supply chain platform provider, over 3,000 US and European firms have at least one direct tier-1 supplier in Russia or the Ukraine. Indirect relationships (tier 2 and tier 3) affect nearly 300,000 European and US companies.

#3: Critical raw materials to be in short supply (and more expensive):

Russian is one of the world’s largest producers of critical materials such as nickel, copper, aluminium, and neon. These inputs are needed for everything from cars through to batteries and building supplies. Since the invasion, the price of aluminum, for instance, hit a record high of $3480/ton. Russia is the world’s second-largest exporter of aluminium, supplying about 6% of the world’s aluminum.

“Commodity traders and purchasing managers are growing increasingly worried about the way that many raw materials have the potential to be used as weapons of foreign policy — especially if a new cold war develops that divides Russia, and potentially China, from the west,” observes the UK’s Financial Times.

There are also concerns that the Russia-Ukraine conflict exacerbate the ongoing critical chip shortage. Ukraine controls about 70% of the world’s supply of Neon, according to research firm TrendForce. Neon is important for the manufacturing of semi conductor chips - an essential component of modern electronics. The past few years have seen global car makers, in particular, suffer production shutdowns because of lack of chip supply.

“We anticipate an extended period of geopolitical tensions and elevated risk premiums across all underlying commodities following Russia’s invasion of Ukraine. Russia has a far-reaching impact across global commodity markets, and the unfolding conflict has vast implications, not least higher prices,” said Natasha Kaneva, analyst at JPMorgan, quoted in the FT.

#4: Reshoring of manufacturing production to accelerate

In the 1990’s and early part of this century, the buzz was all about “off shoring” everything you could. US firms were shifting their production and supply chains to regions where they could benefit from cheaper labour and materials. In an era of relative political stability this made sense.  Why build yourself when you can take advantage of expertise and cheap labour elsewhere?

Off shoring allowed US manufacturers to significantly push down production costs and increase profit margins; Chinese benefited as well from this arrangement to become the world’s largest manufacturing nation.

However, the coronavirus pandemic illustrated the fragilities of a global, interconnected supply chain. Increasing conflict over trade and tit-for-tit tariffs between the US and China compounded those fragilities and the Ukraine-Russia conflict has shattered any sense that the world is the friendly, stable place that global trade requires.

Even prior to the conflict, many US manufacturers were already looking at bringing production closer to home. Companies like Intel, General Motors and US Steel have announced plans to invest billions of dollars in new American production plants. 

US President Joe Biden is calling for more “made in America” products to reduce reliance on foreign regimes and drive down costs.

"Folks, that means make more cars and semi-conductors in America. More infrastructure and innovation in America. More goods moving faster and cheaper in America. More jobs where you can earn a good living in America. Instead of relying on foreign supply chains. Let's make it in America," he said in this week’s State of the Union Address.

According to industry organization Reshoring Initiative, over 1,800 US firms announced reshoring plans in 2021, leading to the expected creation of 220,000 new jobs in the US. That trend looks set to accelerate if geopolitical uncertainty continues to disrupt global supply chains and trade.