System shock: supply chains suffer in Russia-Ukraine war

With Russian and Ukrainian suppliers mostly out of the picture, critical industries are searching for alternatives
Detail of a rocket missile on the agricultural field near Kyiv area, Ukraine, 06 April 2022 (Photo by Maxym Marusenko/NurPhoto via Getty Images)
Detail of a rocket missile on the agricultural field near Kyiv area in Ukraine

Global supply chains were already reeling from the Covid-19 pandemic. Now the Russia-Ukraine war has added a new wave of challenges, with sanctions and conflict restricting the flow of critical resources. 

Russia is ranked as the 16th-largest exporter by the World Trade Organisation, though it has particular strengths, with petroleum, coal and gas top of its trading list. But the scale of the pullback from Russian businesses is vast, says Brandon Daniels, president at supply chain management business Exiger. 

What we are seeing across the whole supply chain is a huge amount of uncertainty

The company looked at 150 oligarchs and the 2,600 companies in which they have material ownership stakes, finding more than 200,000 supply links to US companies in the critical infrastructure and defence industrial base.  “That is an enormous amount of commerce,” he says.

It’s difficult to reorganise any supply chain, he says. “However, with pervasive sanctions in critical sectors and individuals that own large swaths of global companies, the challenge of finding, analysing and stopping those transactions is Herculean.”

Market shocks 

Kate Tamblin is chief product officer at risk management specialist Achilles and author of the company’s supply chain resilience index. Shocks to supply chains are increasing in frequency and intensity, she says. “Supply chains have not had time to recover, and we now face a critical tipping point that could have both supply and cost ramifications rippling through industrial and consumer markets for years to come.”

The fertiliser industry is one of the key sectors affected by sanctions. “What we are seeing across the whole supply chain is a huge amount of uncertainty, and a lot of risk being carried,” says Jo Gilbertson, head of the fertiliser sector at the Agricultural Industries Confederation (AIC), the agri-supply industry’s trade association.

Fertiliser production is a highly energy-intensive industry. According to the AIC, Europe supplies the UK with nearly 60% of its fertilisers. With 46% of the gas used by European manufacturers coming down Russian pipes, there’s concern that gas could be part of a new wave of sanctions.

While much of the gas used in the UK comes from the North Sea, “we are part of the European market for gas, so our prices are linked to European prices which would soar if the Russian pipelines were turned off,” according to Gilbertson. 

A ton of fertiliser cost £270 a year ago; it’s now nearer £900, Gilbertson says. “Manufacturers have switched off because they know farmers can’t buy at that price.”

There are knock-on effects, too. No fertiliser means less grass, less winter silage, and a drop in dairy production. 

Hunt for new sources

Ukraine and Russia combined account for about 25% of the global grain market. The UK is largely self-sufficient in wheat, but the lack of grain coming onto the market is pushing prices up, explains Alex Waugh, director general of UK Flour Millers. 

An average flour mill processes about 100,000 tonnes of grain a year; inflation means they will need to find an extra £15m to £20m just to buy the feedstock. “We can get the wheat that we need to make flour, it’s just more expensive,” Waugh says.

The same is true of maize, with over a quarter of the UK’s imports coming from Ukraine. Most is destined for animal feed, especially the pig and poultry sector, says Waugh. If it isn’t available, price hikes for eggs, chicken and pork are likely.

Everyone is left scrambling for resources from other countries

Other affected commodities include sunflower oil and neon gas – used to make semiconductors – from Ukraine, and palladium, a precious metal used in catalytic convertors, with Russia accounting for 40% of the market.

Finding alternative markets isn’t simple or cheap, says Gilbertson. More commodities could be shipped from countries such as Canada but transporting them takes far longer than importing from one of the Baltic ports. Other products such as phosphates could be sourced from North Africa, he says, but there is a question over long-term quality, as well as the political and social stability of the region.

With Russia out of the equation, “everyone is left scrambling for resources from other countries,” Gilbertson says. That’s not good news for the UK, which has just 1% of the global agricultural market share and struggles to compete with agricultural powerhouses like Argentina and Brazil. China’s domestic market now uses over a quarter of the world’s reserves. 

A different approach

What can be done? The UK government has taken some steps, such as removing tariffs from US imports, including maize, says Gilbertson. The EU has been more proactive, making €50m available to help fertiliser manufacturers back online. More controversially, the EU is also looking at dropping regulations around GM and planting crops on fallow land, which could affect EU-wide biodiversity and climate change efforts.

But businesses can still take back some control, says Simon Geale, executive vice president at supply chain specialist Proxima. We have moved on from ‘just in time’ and ‘just in case’. “Now the mantra is ‘just go and get it’,” he says. Businesses must accept the change.

Geale says they should approach the market differently, broadening sources of supply.

Some of Proxima’s clients are now buying stock as and when they find it. They’re dealing with one-off spot markets, rather than signing two- or three-year deals. Look internally, too, and assess what deals you already have in place with suppliers, and how they can help.

Stop thinking about a supply chain as linear, advises Geale. “Start thinking about it as an interconnected economy, because there are going to be knock-on effects … Get transparency over your supply chain and the network that supplies it.”

Businesses should look to technology, too. They should consider new programmes and algorithms that can carry out smarter risk checks by analysing patterns along the supply chain, rather than waiting for 100% of the data.

“During the pandemic we saw a lot of businesses’ risk processes fall away as they started to try to make decisions on best estimates … conventional tactics are just not going to apply,” Geale says.