Russia’s invasion of Ukraine is causing severe shortages of the building blocks of industrial production the world over.
The two countries turn out to be prime sources of essential chemicals and other raw materials that go into everything from catalytic converters to breakfast cereal.
Take carbon black, found in batteries, printing inks, cables and automotive tires, among many other products. An estimated 30% of the material comes from Russia, Belarus and Ukraine. Then there’s palladium, one of several metals used in the production of catalytic converters. Russia is responsible for about 40% of the world’s supply.
The list goes on. Other critical metals sourced in large amounts in Russia include platinum and rhodium. Ukraine furnishes half the world’s supply of neon, a key ingredient in the lasers used to make semiconductors. Ukraine’s breakaway Donbas region possesses large reserves of lithium, essential to the batteries used in electric cars. And Russia supplies Europe with between 25% and 40% of the contents of ammonia found in fertilizer, leading to shortages in basic food stocks.
All of this is causing the price of raw materials to skyrocket, and serving as a major driver of the record inflation that’s currently plaguing the U.S. and other industrial nations. Manufacturers that previously changed prices perhaps once a year are now forced to reexamine pricing on a monthly basis, if not even more frequently, notes Garth Hoff, principal of industry solutions with Pricefx. Those who can’t keep pace are seeing their margins erode, he adds.
The supply crisis is having additional ripple effects on global commerce, Hoff notes, including a rise in the theft of catalytic converters, and producers circumventing some price increases by selling into the gray market.
In such a volatile environment, manufacturers and producers must do more than just pass along increases in the cost of their raw materials. They should be thinking about alternative sourcing, and even developing new products and methods that rely less on the elements that are in short supply. Some farmers, for example, are considering rotating their crops in a manner that requires lower levels of nitrogen-driven fertilizers. Or they’re switching to new types of cattle feed involving different protein products.
On the retail end of the food supply chain, Hoff says, merchandisers are deal with the higher cost of materials by shrinking the size of packages. In the process, they’re raising prices on the shelf without the perception of doing so.
Some economists believe the current inflationary cycle is peaking, and markets could begin to see some relief by the end of this year, with a “very slow return to normal,” Hoff says. But don’t expect to see manufacturing return to its old procurement model anytime soon. Stung by the bitter fruit of Russia’s latest aggression toward Ukraine, producers are reevaluating their dependence on that country for a broad range of materials and products, such as grain and natural gas. The same exercise is taking place among companies that have leaned on China for decades as the main source of manufactured goods sold in the West. The trade war that erupted between China and U.S. over the last several years served as a wakeup call to supply chains driven entirely by the lure of low-cost production. (Or not so low, when you figure in rising Chinese factory wages, the cost of shipping finished goods over long distances, and the fallout from factory closures and post congestion triggered by the COVID-19 pandemic.)
Countries such as Mexico and Vietnam could be the beneficiaries of reshoring strategies that seek to minimize China’s role in global goods production. The U.S., too, could see the return of some manufacturing capacity, as producers seek to localize supply of materials such as microchips.
But such moves could take years to complete. In the meantime, the supply crisis in sectors such as electric vehicle production could grow worse, prompting manufacturers to explore both long- and shorter-term solutions.
“Whether you’re a manufacturer or distributor, as you’re thinking about your pricing and procurement strategy, you can’t go back to being complacent,” Hoff says. “You need to be smart, not just about your pricing perspective, but a lot of things around core pricing discipline.”
Chief among those factors, he says, is gaining certainty of supply, whether that means exploring alternative markets or taking advantage of gray-market and cross-border opportunities.
“After two to four years of repeated black swan events,” Hoff says, “we all have to realize the need to be prepared for the next one — to be prepared for anything.”
Next: The impact of Russian sanctions
Timely, incisive articles delivered directly to your inbox.