Russia’s invasion of Ukraine has businesses throughout Europe and Britain bracing for even higher inflation and disruption to their supply chains.
Experts say the conflict will amplify the economic impact of the pandemic and reverberate through an increase in the cost of energy, shipping and commodities.
Sectors need to examine not only their direct exposure to the conflict, but also the exposure of their suppliers. It’s not just a regional conflict — it’s global.
The biggest impact, not only for the U.K. but Europe generally, “is very much going to be in terms of what it means for supply chain cost inflation,” said Chris Rogers, principal supply chain economist at freight forwarding firm Flexport.
For example, if you’re a food and drink producer in the U.K., CO2 will be more expensive, because the price of natural gas used to create it will rise, he said, along with the cost of aluminum used in cans as the conflict pushes up the price of commodities.
The conflict has already “had a significant impact on global commodity prices,” Rogers pointed out in new research. Crude oil has hit its highest point since 2014. Saudi Arabia has said it will not step in to release more supply if Russian oil exports drop. As oil prices rise, the bunker fuel used in container ships and jet fuel for air freight “will get more expensive,” Rogers explained. Global shipping prices are already sky high, pushing up the prices of manufacturing inputs.
“It’s those kinds of knock-on effects,” he said, that will hit different sectors in different ways, and “it’s up to companies to understand what their upstream supply chain looks like.”
The U.K. announced its second tranche of sanctions on Russia in as many days on Thursday. These were targeted at Russian finance and the defense and energy sectors.
Anything that leads to sustained energy price rises, said Karen Betts, chief executive of the Food and Drink Federation, could add to “an already troubling inflationary picture.”
“Past experience tells us that disruption to Ukraine’s exports will have an impact on global food supplies and on the price of a range of key commodities, such as vegetable oils and maize, which are important in U.K. food production,” she added.
The U.K.’s meat producers are looking on with trepidation. Russia produces two-thirds of the ammonium nitrate fertilizer farmers use the world over, Nick Allen, CEO of the British Meat Processors Association (BMPA), pointed out.
Its price has already doubled in the past year and if farmers can’t get the fertilizer they need, they will not be able to grow the amount of grass they normally do for their grazing livestock, he said. “Couple that with the fact that Ukraine has a massive influence on wheat prices … [and] feed costs could go up substantially as well.”
The conflict, Allen added, is sparking “serious concern” among milk and meat producers in the U.K. as it is unfolding with a speed and unpredictability that means consequences will “only surface as the situation develops.” He said businesses need “to look at their supply chains and think what the potential impacts could be.”
Firms are already “taking steps to diversify their supply chains and if necessary shift production,” said a Confederation of British Industry spokesperson. “But these events will inevitably affect global energy prices, adding further to the cost of living crisis.” Consumer price inflation in Britain has already risen to a 30-year high and could rise further still, propelled by the conflict.
“At this stage, it’s very much a commodity and bulk shipping issue,” said Rogers, noting Russia’s move on Odesa means exports of wheat and iron ore from Ukraine to Southern Europe and Turkey could effectively be cut off.
The “big question,” Rogers said, is whether natural gas continues to flow from Russia to Europe. If it does, the impact of the conflict “will be probably relatively minor.”
Western sanctions coordinated between the EU, U.S. and Britain, however, could change that. And Russia could also cut its supply to Europe, Rogers pointed out. The impact would ripple through the food industry, metal-intensive manufacturing and petrochemicals.
“The big-ticket item,” he said, “would be the decision to sanction Gazprom broadly, not just Nord Stream 2.”
Britain’s trade department is urging businesses concerned about how the conflict will impact them to get in touch through its Export Support Service.
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