War in Ukraine: Commodity Market Chaos and Procurement Risk Management
Last updated Dec 5, 2022 - 10 min read
- Table of Content
The world has been turned upside down since the pandemic laid waste to global supply chains, and now the situation has gotten worse. The unfolding of the war in Ukraine has created a dire situation for global supply chains. This tempest will cause ripple effects that will eventually spill over into supply chains around the world. The same goes for your business, especially if you ignore procurement risk management.
If your global supply chain travels through Russia or Ukraine or their neighbors, there's a strong chance you're already feeling the pain.
We are all in this unpredictable mess together.
In a world increasingly becoming more and more globalized, companies are starting to feel the effects of conflicts halfway around the world.
Even for companies without a Tier 1 or Tier 2 suppliers in these countries, the conflict can create some debilitating disruption across industries from energy to agriculture.
What can be done about this? Some companies have been able to shift their sourcing from these regions, but this can be difficult or even impossible for some industries.
Situations like this highlights the significance of proactive category strategies that take supply risks into account. The best thing you can do is to monitor and stay updated on the situation and systematically assess supply risk and potential mitigating measures so that you will be as prepared as possible to combat such challenges.
So, the global supply chain is in a state of flux, but for sourcing and procurement professionals, these changes can be particularly challenging.
But what does that mean? What changes are coming? Well, the team Ignite has some insights that could help you prepare for the challenges ahead.
Understanding the Crisis in Ukraine and its Global Supply Chain Effects
The effects of the crisis in Ukraine on global supply chains are complicated but can be categorized into two major groups: direct and indirect risks.
Direct risks: We define direct risks as any disruption to supply that's directly affected by the war in Ukraine. This could include sites for product, component, or raw material production that are shut down either due to destruction or lack of labor, power, inputs, etc.
Indirect risks: The indirect risks from the conflict derive from supply disruptions caused by trade sanctions on Russia, including government-imposed financial restrictions that limit its ability to sell goods and raw materials into the world market.
A Breakdown of the Ukraine Crisis: Commodity-Wise Impact
The global economy is facing higher commodities prices as the conflict between Russia and Ukraine continues to escalate.
The Economist Intelligence Unit (EIU) has released a report detailing their predictions for the impact of the Russia-Ukraine conflict on commodities prices.
As per the report, severe consequences for the global economy aren't expected; however, as anticipated we have already witnessed a price rise for oil, gas, base metals, and grains in response to concerns around supplies, destruction of physical infrastructure, and sanctions.
Crude Oil: Ukrainian conflict will keep oil prices high; they are expected to remain at US$100/b or more as long as fighting continues in eastern Ukraine.
Markets for crude oil and petroleum products have already tightened because of rising world demand, which has increased more than 1 million BPD this year.
Tensions between Russia and the West will aggravate that tightness due to the threat of sanctions on Russian hydrocarbon exports and uncertainty about supplies from the country. Some traders are also avoiding Russian oil out of concern about US secondary sanctions on financial transactions with Russian entities.
Gas: The gas price will likely rise by at least 50% this year, on top of a fivefold rise last year. Europe has limited gas stockpiles, and concerns are mounting about gas availability for the 2022/23 northern hemisphere winter season.
The long-term effects of the current conflict in Eastern Ukraine can significantly impact the energy supply chain.
Russia is one of the largest producers of natural gas in the world, and the ongoing invasion will create a major energy deficit, causing prices to rise and negatively impacting industrial production capacity. The impact of it will be felt most strongly in Russia and Europe.
Germany, which is an automotive hub with a large battery manufacturing footprint, will be one of the countries hardest hit as it relies heavily on Russian natural gas for its electrical and industrial needs.
Base Metals Like Aluminum, Palladium, and Nickel:
While Russia is a major producer of oil, it's also a major producer of several base metals (aluminum, titanium, and nickel). And following spikes in all of these markets last year, prices will remain at peak levels as long as the conflict continues.
Russia is the third-largest supplier of nickel for lithium-ion batteries, and ever since the invasion, the category has been facing a lot of pressure. Since the Ukrainian invasion, the world price of nickel has risen 19% – to a 14-year high of $29,800/metric ton. And for the year so far, it's already up 37%.
Ukraine is home to some of the largest titanium and iron ore reserves on the entire European continent. And then there's Russia's VSMPO-Avisma: a company that owns the world's largest titanium production capacity (34,000t/yr) and supplies massive quantities to Airbus and Boeing for use in their aircraft hulls.
Russia and Ukraine have historically supplied a large share of global output for products like nickel, titanium, and uranium. That said, it will be difficult to find alternative suppliers, creating the conditions for continued high prices.
When it comes to aluminum, Russia accounts for 6% of its global production. No sanctions have been imposed by the EU on this category so far. The prices for aluminum and copper have been on the rise for a while now. However, this trend isn't likely to continue. The reason is that there are spare capacities in China to keep the prices stable or even allow them to decline.
The price of gold, which is often used as a safe-haven asset in times of economic uncertainty, recently saw an increase in demand due to the crisis between Russia and Ukraine. The price of gold has been steadily climbing since the start of the conflict.
The same thing happened with silver: people were buying it because it was a safe way to invest their money.
Russia produces around 35% of the world's palladium, and Norilsk Nickel, a Russian company, is the largest palladium producer in the world. Many countries are worried that their supplies of palladium will be disrupted, so they're looking to secure their supply chains. This fear has led to a 37% increase in palladium prices since the start of the year. And as the conflict and sanctions prolong, further price escalation is expected for this category. Palladium is up 57% for the year.
In particular, palladium and platinum—metals mostly used for industrial purposes in the automotive sector—could see their prices squeezed due to concerns about availability in light of Russia's dominant role in these markets.
The supply of some agro-commodities has been disrupted due to the conflict between Ukraine and Russia. It is anticipated that some grain prices could witness a significant increase in time to come.
Wheat and corn:
Ukraine and Russia together account for nearly a third of the world's wheat market, 19% of the world's corn supply, and 80% of exported sunflower oil. However, due to the current conflict in the region, shipments of these items have been halted.
The Chicago Board of Trade or CBOT futures witnessed an immediate increase of 5.4% on February 24, the first day of the Russian invasion of Ukraine. The prices settled at $9.42 per bushel compared to $8/bushel on February 18.
Likewise, the corn price in the CBOT witnessed an increase of 2% this week and settled at 6.94 USD/bushel for the May contract. The rise in the price was due to the disruptions in the Black Sea.
Currently, wheat, maize, and barley prices have seen a jump of 28%, 23%, and 22%, respectively.
Ukraine is the largest producer and exporter of sunflower oil. On February 24, just after the Russian invasion, the country witnessed a rise in export prices of sunflower seeds by 7%.
Large importers such as India are expected to face a severe shortage of edible oil, which will result in higher prices for consumers.
Prices of other edible oils have risen by at least 3% in top producing markets after the Ukraine-Russia. Palm oil, one of the most widely used oils in the world, has seen an increase of 7%, while soybean oil is up 3%.
- Without fertilizers, winter crops in conflict zones could see yield reductions of over 30%.
- The conflict will significantly affect the crops that need harvesting or planting now. And these impacts could affect global food security unless the crisis is resolved soon.
- Russian forces currently occupy at least half of all sunflower seeds produced in Ukraine, and those regions historically provide 16% of global seed exports. This represents a significant drop in seed supply, affecting the global market.
- Ukraine is the world's largest exporter of maize, but over 40% of its production is centered on regions that are currently under Russian forces, which means the farmers will miss the planting season. Production from these regions historically represents 6% of global exports.
- The rise in energy prices will result in a rise in freight costs, which will add to the cost of food grains. The volatility of energy prices will impact the production of ethanol and bio-diesel, which in turn will affect crop prices.
Recommended Actions for Procurement to Mitigate Supply Chain Risks
The conflict between Russia and Ukraine is sending ripple effects across the supply chains. Amidst the disruptions, higher line-haul trucking rates and rising fuel prices is a lurking opportunity to improve the supply chain.
The most important thing here is supply chain resiliency and flexibility. While companies can predict some of the outcomes, others are murkier, especially for companies without adequate visibility.
Hence, it's crucial to stay up-to-date on the latest news from these countries and commodity price developments, even if you don't do business with them or rely on their products.
In a world where supply chains are getting more and more digitized, in these unprecedented times, it seems that these disruptions are better dealt with now than ever before. This is all because so much information is available at your fingertips.
If you can see everything happening in your supply chain, then you can manage it better; and if you can identify which parts of your supply chain are most important to your business (i.e., mapping risk), then you'll be able to make more informed decisions about how to improve your operations going forward.
Here's what procurement teams can do to mitigate such supply chain risks:
1. Know your suppliers: Start with knowing who your tier one suppliers are. And if you already know them, start to map your tier two and three suppliers. Here, procurement analytics comes in handy as it couples reliable data with powerful algorithms to help companies uncover: potential supply chain vulnerabilities and commodity price volatilities.
Suppliers are a critical element in any business and important to understand. Some of the insight can come from internal data and assessments— such as whether the supplier has a track record of delivering on time, lives up to their contractual terms, good ESG ratings, and manufacturing products that meet required quality standards.
Other critical information can be gleaned from external sources, such as outstanding debts, supplier financials, connections to troubled parent companies, etc.
2. Visualize your risk exposure: The recent events in Ukraine and Crimea have caused some global companies to reconsider their sourcing strategies for Eastern Europe, Russia, and nearby countries.
Determine whether you should continue to source from this region or shift to alternate sources.
Make sure you understand the risks of your supply chain leading to Eastern Europe, Russia, and nearby countries. You should map key products and categories to check their exposure to these high-risk areas.
3. Forecast commodity pricing: Create a quantitative forecasting capability that can explain the reasons behind underlying price movements as well as the predictions themselves. This will help others outside of procurement, trading and supply chain to develop potential decision paths.
When these types of tumultous events occur, it can be daunting to navigate the complexities and risks associated with them. But you don't have to do it alone — we're here for you.
Ignite helps organizations build and analyze their supply chain to prepare them for any risk or disruption that might threaten their business. Helping you through every step of the process—from knowing your suppliers to assessing their financial health and developing accurate commodity price data and insight, Ignite equips you with the knowledge and tools that put you in control of your success!
We do so by sourcing information on suppliers from reliable providers and equipping companies with supplier assessments to capture the exact information they need about their supply base. We'll also help you visualize that data to make informed decisions about your business.
Not only can we help you prepare for risk, but we also help you avoid it altogether by providing strategic guidance on your supply chain so you're better positioned to handle anything that comes your way.
Our goal is to empower you to overcome challenges and succeed in your industry—no matter what.
Ready to learn more about Ignite and how it can help you with procurement risk management? Then get in touch with us — we'd love to show you how Ignite Spend Management can work for your enterprise!