5 ways the Russia-Ukraine war affects the manufacturing industry

Many countries were taken aback with the Russian invasion of Ukraine. Even as it was happening, companies would probably have had an easier time procuring supplies this spring with the sharp drops in Covid-19 instances both in the U.S. and across most of the world over the previous month, as well as changes in many governments' approaches to fighting the disease. Its invasion of Ukraine poses a threat to the world's supplies of steel and materials like neon gas and palladium that are essential for the fabrication of semiconductors. The violence has already started to affect shipping around the world, and the spike in oil prices it has caused will raise transportation and production expenses.

There are counterbalances to take into account as well: Russia exports commodities but imports capital goods, manufacturing inputs, consumer goods, and transportation machinery. It will be able to purchase far less from overseas as a result of the sanctions and the severe decrease in the value of the ruble, perhaps alleviating supply constraints elsewhere.

1. Costlier production will result from rising energy prices

According to Statista, Russia is the third-largest producer of oil in the world. One out of every ten (12%) barrels of oil produced worldwide comes from this country, which also supplied 43% of the additional gas imported by Europe in 2020. While Western sanctions have so far permitted Russia to continue exporting fossil fuels, the conflict has caused sharp price increases due to worries about supply availability in the coming months.

The American government will make every effort to minimize the financial hardships experienced by the populace each time they fill up their petrol tank. To ensure the security of the world's energy supplies, they are working with the main oil-producing nations, and they will release more barrels of oil from the US strategic reserves as necessary.

The high price of oil and gas will raise the cost of energy used to power important manufacturing processes and increase the pressure on global inflation.

2. Supply chain difficulties will worsen

Land-based supply routes between Europe and China sometimes involve train travel along sections of the "new silk road". These routes, which offer a crucial link between China and the West, have seen a sharp increase in traffic in recent years.

Trans.info claims that the average train load on these routes was 60% greater in the first half of 2021 than it was in the corresponding period of 2017, and that there were also more trains despatched on average each day. Because some of these routes pass via Russia, worries over their ongoing effectiveness and availability are placing pressure on alternate routes and raising their costs.

According to supply chain visibility platform FourKites, the cost of maritime freight has increased by more than four times recently. Container shipping costs from Shanghai to Rotterdam were less than $2,000 two years ago. Drury freight indicators showed spot container costs for the same route rising above $13,000 in recent weeks. A few freight forwarders soon after displayed charges of $54,000 for a single container.

Some Russian manufacturers are being compelled to stop or reduce their production. For instance, Toyota Motor Corporation declared today that it would suspend operations in Russia due to supply chain issues. About 2,000 employees work at Toyota's St. Petersburg facility, which generates 80,000 cars a year.

Numerous US and European companies also have important suppliers in Russia and the Ukraine. Over 3,000 companies in the US and Europe have at least one direct tier-1 supplier in Russia or the Ukraine, according to data from supply chain platform provider Interos. Nearly 300,000 US and European businesses are impacted by indirect ties.

3. Critical inputs will be harder to get by and more expensive

Critical commodities like nickel, copper, aluminum, and neon are among the materials that Russia produces the most of anywhere in the world. These inputs are required for a variety of products, including building materials, batteries, and automobiles. Aluminum, for example, just reached a record high price of $3480 a ton. With 6% of the global aluminum supply, Russia is the second-largest exporter of aluminum.

The UK Financial Times reports that purchasing managers and commodity traders are growing more concerned about the possibility of using many raw materials as instruments of foreign policy, particularly in the event that a new cold war breaks out between China and the west, dividing Russia, and possibly also China.

Additionally, there are worries that the conflict between Russia and Ukraine will make the current vital chip shortage worse. According to the research company TrendForce, Ukraine is responsible for controlling almost 70% of the global Neon supply. Semiconductor chips, a crucial part of contemporary electronics, require neon for manufacture. Global automakers have experienced production halts during the past few years in particular due to a shortage of chip supply.

According to JP Morgan, after Russia's invasion of Ukraine, we should expect a protracted period of geopolitical tensions and elevated risk premiums across all underlying commodities. Russia has a significant impact on the world's commodity markets, and the ongoing conflict has far-reaching effects, not the least of which are rising prices.

4. Accelerating manufacturing production through reshoring

The craze in the 1990s and the early years of this century was all about "offshoring" as much as you could. US businesses moved their supply chains and production to areas with less expensive labor and raw resources. This made sense during a time of largely stable political conditions. Why construct something yourself when you can use labor at a lower cost and skill elsewhere?

Offshoring helped US firms lower production costs and boost profit margins; Chinese manufacturers also profited from this arrangement, which helped them overtake the US as the world's top manufacturer.

The coronavirus pandemic, however, demonstrated the weakness of a world-wide, integrated supply chain. The fragilities were exacerbated by rising trade tensions and reciprocal tariffs between the US and China, and the crisis between Russia and Ukraine has dispelled any notion of a friendly, stable world that is necessary for international trade.

Many US manufacturers had already begun to consider localizing their output before the crisis. Businesses like Intel, GM, and US Steel have announced intentions to invest billions of dollars in brand-new manufacturing facilities in the United States.

Particularly in the context of an ongoing pandemic, it is impossible to predict how the complexity of global supply networks will combine with the uncertainty of conflict. Don't bet on factories finding it even more difficult to secure the supplies they require just yet. However, the more manufacturers globally will feel the pain of the sanctions and war as time goes on.

Corporality Global is a brand that aims to enlighten you about the various marketing strategies and helps you get in front of your audience. CEOs and CMOs can take control without disrupting their existing framework and infuse potent schemes to help business growth. Book a discovery call with us today!