How Resilient Is Your Supply Chain

The Oil and gas industry is particularly vulnerable to the Ukraine, Russia conflict. To truly understand the impact of the crisis we need to understand how Russia and Ukraine are important to the global supply chain. Even before the conflict, Oil and Gas were seeing significant price rises due to the impact of Covid 19, as the various national lockdowns lead to a fall in production and pricing globally. The re-opening of the global economy caused pricing to shoot up with the rise in demand outperforming production. This situation has been made worse by the Russia/ Ukraine conflict as Russia accounts for 17% of global gas supply and 12% of oil production. European countries such as Italy and Germany are reliant on Russia with Italy alone importing 90% of its gas, in turn generating 40% of its electricity from Russia. President Biden set in place sanctions prohibiting the importation of oil, refined petroleum products, natural gas and coal from Russia in direct response to the Russia / Ukraine conflict. These restrictions have pushed up pricing, intensifying the increasing pressures of inflation across the US. While energy companies are working to increase production, prices remain high. 

 

Whilst these worries persist expect pricing to remain high and volatile as the markets digest the latest news. At the time of writing, oil has fallen back slightly due to city-wide lockdowns in China; exemplifying the fact that volatility will remain while the market is nervous about Covid and the consequences of the conflict. To help mitigate the impact, review your supply chain. Can you hold more stock, reduce your delivery days, or increase your average delivery value? Even the smallest change could make a significant impact. Of course the changes implemented do not need to be permanent. 

Putting Oil and Gas to one side; production costs have been compounded by price increases in fertilizer, of which Russia accounts for 15% of world market share along with Ukraine at 1%. Russia is unable to export along with the Ukraine banning exports of phosphorus, potash, nitrogen, and blends. This leaves farms across the world to decide whether to buy and cut margin or produce with a lower yield, with a knock-on effect across the crop production and supply. Again, ensure you are communicating regularly with your suppliers, as relationships will be critical. 

Now let’s explore the impact the war has had on food commodities such as: Wheat, Corn and Sunflower oil. Let’s begin with Wheat. Seven countries make up 86% of wheat exports while three countries hold 68% of the world's wheat reserves. These figures are mirrored across grains, rice and soybean. Prior to the conflict, Russia and Ukraine supplied c.30% of the global wheat and barley supply. Needless to say that the conflict has had dire implications across global food supply markets. Ukrainian production is expected to be at least 10 million tons lower year on year. An end to the conflict would not immediately translate into an increase in production due to the level of infrastructure damage across the country (an estimated 80 billion dollars’ worth). Whilst wheat pricing is high now, be sure to monitor any news coming out of India which has a large stockpile which they may bring onto the market. 

 

Corn, along with wheat, is seeing significant price inflation due to Ukraine being among the top global producers. Worryingly with 60% of corn growing areas located within conflict zones there is a question mark around how much or if any can be planted. Corn is a key ingredient in animal feed, which is pushing up other commodities within the Meat & Poultry and Dairy industries. It compounds the increases already being seen in oil, gas and labour. Eastern Europe has been a popular origin for corn, look at sourcing from alternative origins such as Turkey to help mitigate the impact, however, expect prices to continue to rise. 

 

The concern around planting extends to sunflower oil, 65% of which is produced in conflict zones. At the time of writing reports suggest the EU has 2-3 weeks of stock left. The commercial fall out we can expect with sunflower oil is much greater than wheat and corn since Ukraine and Russia are the main global exporters. Ordinarily buyers would switch into rapeseed oil. However, last year’s harvest was heavily impacted by drought in Canada and a switch into rapeseed will put pressure on an already tight market (watch out for palm oil increases also). This will be further exacerbated by the increases seen in the dairy market as buyers look to switch away from products such as butter to alternatives with sunflower oil as the key ingredient. If you haven’t already, we suggest you lock in your rapeseed (sooner rather than later) till the end of the year. If already locked in your volume, look to blend your price and cover yourself for longer. 

The impact on crop production is obvious but what is less clear from the outset is the impact on Poultry. The US exports more than $130 million of poultry and poultry products annually. This trade is severely impacted by the Russia / Ukraine conflict since the US imports most of its oil seeds and grain from Ukraine and neighbouring countries to feed the birds. 

 

According to the UN’s Global Food Price Index in the last year, food prices have risen dramatically: meat is up 17%, sugar is up 20%, and vegetable oil is up 34%. The Russian/Ukraine conflict has sent shockwaves across global food and energy markets meaning a previous focus on efficiency should now move to resilience 

 

If you require support or expert advice across your supply chain, speak to us at Procure4, our procurement and supply chain experts have the relationships, inside knowledge and insight to ensure your business is in the best position possible.