The escalation of tensions between Russia and Ukraine has worsened global supply chains, according to the Citi GPS Global Supply Chains report.
The report titled, ‘the complicated road back to normal,’ examined the multiple challenges that have afflicted global supply chains and concluded that supply chain conditions remained remarkably tight.
The report noted that it will be difficult to envision any meaningful improvement in overall supply conditions as long as the Russia and Ukraine conflict persists.
While noting that the Russia-Ukraine conflict gave the first-order shock to energy supply such that Brent oil price surged upward, topping $120 per barrel in March and European gas prices surged higher, Citi said that industries, including paper and stainless steel, are now having production challenges due to volatility in energy price.
“The risks and pressures on supply chains extend well beyond energy. Ukraine is a significant exporter of neon gas, which is used in the production of semiconductors. While we understand that the major manufacturing firms generally have sufficient inventories to buffer the shock, the picture for smaller producers is less clear. Ukraine is an important producer of automobile cable disruption which is squeezing auto production in Germany,” Citi said.
The report further said that Russia and Ukraine are key global exporters of a significant range of commodities, many of which have seen an upsurge in price volatility.
“These two countries are the largest exporters of wheat, processed nickel, and fertilisers. They are the second-largest exporters of lumber, refined copper, steel, ammonia, and titanium, and the third-largest for aluminium, coal, and gas turbines,” Citi added.
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While noting that the world is watching the prospects for food prices, the report said that the limited shipments of key products, including wheat, corn, and fertilisers have heightened supply disruptions in the months ahead.
“For the developed-market economies, this is likely to bring unwelcome pressures on inflation. For the developing countries, especially some in North Africa that is food importers, the implications could be even more severe and bring outright shortages and a possible humanitarian crisis,” the report said.
It, however, noted that if the conflict persists, it would make the availability of some of the commodities and materials exports from Russia and Ukraine to be threatened in one way or another.
“Many firms have been drawing down previously existing inventories. But to the extent that the conflict persists, inventories will eventually become depleted, which is likely to bring a non-linear upsurge in stresses. These challenges are likely to emerge at different times and in different ways across firms and countries. We see the risks for supply chains in the months ahead as skewed toward further deterioration, at least pending the resolution of the conflict,” the report added.
According to Citi, the disruption in the global supply chain was formerly widened from linkages between China and the U.S. West Coast to also encompass linkages between Russia-Ukraine.
“The pressures previously were largely about the availability of manufactured products as well as the availability and cost of shipping. The new disruptions, in contrast, are focused more on the constrained availability of commodities and materials, which is a pure supply-side disruption,” it added.
