The war in Ukraine is putting global supply chains to the test againThe war in Ukraine is putting global supply chains to the test again.
Even before the conflict began, supply chain frictions had only improved marginally from the pandemic.While financial markets recovered their strength somewhat early on Monday, on hopes for progress in Russian-Ukraine peace talks even as the conflict rages on.
The pandemic had already distorted global supply chains and just when the world had put the impact of the coronavirus disruptions in the rearview mirror, Russia invaded Ukraine, the biggest attack on a European State since World War Two.Crude oil prices hit multi-decade highs on supply concerns and so did a braod range of commodities, with several of them hitting their all-time highs."The improvement in global supply chains has ended before it ever really began.
The war in Ukraine will bring longer-lasting disruption and the trade outlook will bear the consequences of sanctions.
Expect a new round of delays and protracted supply shortages," said economists at ING."The biggest hit to supply chains would come from any severe disruption to Russian energy exports, as several European countries are dependent on Russia for energy.
But even in the absence of this, there are more challenges to come.
In addition to exporting agricultural products such as wheat, corn, and sunflower oil - India, China, the Netherlands, and Egypt are large consumers, both Ukraine and Russia export large amounts of steel, palladium, platinum, and nickel, among others," they added.Crude prices have soared since the invasion, which Moscow calls a "special military operation, but with talks of supply boost from other countries, including Iran, they have stabilised somewhat in recent days, with higher volatility tracking the news flow.
But Brent crude still remains near $110, a pain point for the world already facing rising price pressures and anaemic growth.The automotive sector already faces supply chain consequences."The automotive industry, in particular, faces renewed operational problems because of the war, while the semiconductor shortage continues to drag on.
BMW and VW have already seen production interrupted at European sites due to disruptions in the supply of components from Ukraine, such as wire harnesses.
This affects both the production of conventional cars and electric vehicles, with some lead times extending into next year," said ING's economists.What the supply strains will do is weigh on world trade, which had just about started to recover from nationalist policies by the US in raising import taxes, specifically on Chinese goods and then the retaliation tax hikes by China, and the broad disruptions to global markets from the pandemic."Delays and congestion suggest longer-lasting problems for supply chains.
Sailing and air freight schemes have to be reorganised and delays will intensify as Russian products are subject to sanctions, meaning that container cargo destined for Russia will receive extra customs inspection.
Delivery of crucial preliminary products to European manufacturers will be delayed, if they arrive at all.
On top of that, scarcity and delays mean further price pressures, resulting in rising prices for producers and consumers," noted economists at ING."World trade will weaken more sharply than previously expected.
Following the pandemic, continued supply chain troubles and higher inflation and shipping costs pose further downside risks to our trade outlook.
Sanctions on several products previously exported to Russia, voluntary bans on exports and efforts to reduce oil and gas imports will all hit global trade this year," they added.While, the Russia-Ukraine war rages on, the post-pandemic demand is expected to help global trade and the complex global economy will thrive as not all regions are engaged in the sanctions' threat and retaliation news flow."We continue to expect some growth in world trade volume in 2022.
The US economy and the Asian region ex-China have limited direct economic linkages to the area, speaking in favour of continued trade, although they are not immune to the indirect consequences of this conflict, such as a sharp drop in demand from Europe.
Trade growth might hover just above the 0 per cent area if the war drags on.
But whatever happens, trade flows will be significantly reshaped," said ING.