Supply Drops Expected to Rattle Commodities admin 16.02.2023

Supply Drops Expected to Rattle Commodities

Alongside tragic human consequences, the war between Russia and Ukraine has had manageable economic implications for the majority of the globe thus far. Even though the US economy is already feeling some of those effects, there should be enough offsets to keep the pain at bay. It is important to note, however, that regional ramifications will vary depending on the circumstances. While heightened energy prices and links to the Russian economy can make other places vulnerable, the supply shock could prove beneficial in oil-producing areas. Despite these differential impacts, their expected trajectory is not significantly altered. However, when tensions escalate, and sanctions increase, that could change.

Severe disruption to the global energy market was and will remain the most fundamental impact associated with recent events. As Russian oil and gas supplies have diminished and the Nord Stream 2 pipeline has been closed, prices have already risen noticeably. In the near future, gasoline is likely to become even more expensive unless the conflict is resolved unexpectedly. There is no doubt that this is a headwind to European growth, but the situation is more complex in the US Energy production is expected to increase in a handful of regions as prices rise, driving rig counts upward.

However, with that being said, the current situation unfolding in global supply chains is unique in that it has had a global impact. Over the years, there have been many challenging periods. Production, operations, and consumption are all affected by the ripple effects.


Supply Chain Risks & Global Agriculture

The Eastern European region supplies the world with a variety of commodities. More than one-third of global cereal consumption comes from Russia and Ukraine, representing 14%, 19%, and 4% of the wheat, barley, and corn consumed globally. Approximately 50 countries use their output to feed themselves, many of which are least developed nations, according to the UN’s Food and Agriculture Organization (FAO). The Russian agricultural industry is one of the largest producers of fertilizers in the world, including nitrogen, phosphorus, and potassium. The growing conflict in the region raises concerns that there will be shortages and yield issues, not only in Ukraine and Russia but around the world, as farmers everywhere will be affected by the Eastern European supply shortage. Furthermore, rising energy prices affect the cost of transportation of commodities.

Among Ukraine’s major exports are cereals and edible oils, and much of its wheat is grown in the southern and eastern regions where Russian military operations are intensifying. Meanwhile, Russia and Belarus (both subject to significant sanctions) are key exporters of agricultural inputs, including fertilizer. Concerns are growing about the effects the conflict will have on the global food supply – UN chief Antonio Guterres pointed out on 18 May that the number of severely food insecure people worldwide had doubled in the past two years and warned of years of famine if there is no resolution to the global food crisis.

Food-related unrest is likely to increase over the next few months in parts of the Middle East, North Africa, and Sub-Saharan Africa as staple food prices rise. A spike in food prices in 2007-08 and 2010-11 sparked food riots across several regions, precipitating political instability and conflict in the Middle East and North Africa. Several Asian countries, including those with recent histories of social unrest, rely heavily on grain from Russia and Ukraine.

As a result of rising global food prices, governments may restrict exports of food and fertilizers to ensure domestic food supply and control prices. Despite surging inflation, India – the world’s second-largest producer of wheat – banned exports of the cereal, causing global wheat prices to jump by an additional 6%. Since the conflict began, about two dozen other countries have imposed restrictions on food exports. Other countries could suffer further hardships if additional restrictions are imposed.

Global businesses are affected significantly by this. Due to the scarcity of resources, Ukraine and Russia will not only be unable to produce their usual output but also see higher prices for those products. In the last month alone, wheat prices have risen by 50% due to the conflict. Consequently, if poorer countries are forced to purchase essential foods at higher prices, it may trigger further economic protectionism, resulting in a decrease in global purchasing power.

Chip Shortages Resulting From Supply Chain Disruptions

In addition to the above, the semiconductor and chip industries pose a serious concern. There was a chip shortage in the world before the conflict in Eastern Europe began. Consumers were unable to obtain chips during the pandemic due to a misalignment between supply and demand. As a result of the ongoing crisis, the situation has worsened. Neon is a major commodity produced in Ukraine, while nickel, platinum, silver, and palladium are key commodities produced by Russia. The semiconductor industry relies on all of these ingredients. The semiconductor industry is predicted to grow by 50% over the next four years, according to industry experts. A shortage in supplies will lead to rising prices for semiconductors and semiconductor materials if the situation continues to develop in the same way.

Using responses from the S&P Global Manufacturing PMI survey, the S&P Global PMITM Commodity Price and Supply Indicators track the development of price pressures and supply shortages for at least 20 commodities each month. Semiconductors experienced the most severe upward price pressure in April. However, there are hints that supply shortages and price increases for semiconductors are peaking, though the situation is still severe by historical standards.

The Impact on Fuel and Fuel-Related Commodities

Globally, Russia exported the most natural gas in 2021, the second most crude oil after Saudi Arabia (and third overall behind the US and Saudi Arabia), and the third most thermal coal after Indonesia and Australia. There has been a voluntary boycott of Russian oil announced by some buyers since the start of the Ukraine conflict, while Western powers have imposed restrictions and sanctions on Russian energy imports. Oil imports from Russia have been banned by the US and Canada, and the UK has pledged to wind down imports in 2022. With the aim of reducing gas imports by two-thirds by the end of 2022, the EU has banned Russian coal imports. There are also plans to ban Russian oil in the EU, though the decision has been delayed due to opposition from some members of the bloc. Increasing global competition for oil, coal and liquified natural gas (LNG) is driving up prices and causing shortages in other regions as Western countries seek alternatives to Russian fossil fuels.

Globally, rising energy prices have long been a major cause of civil unrest, and in 2021, energy-related protests rose. Civil unrest in dozens of countries around the world has increased since the conflict in Ukraine began on 24 February. Power supply disruptions (including power cuts) and rising fuel costs will likely continue to spark protests (especially in lower-income countries where energy makes up a large proportion of consumption).

Due to limited coal supplies at most of the country’s power plants and a heatwave that has increased electricity demand for cooling, protests have erupted in some areas of India since April. Fuel prices increased in Peru in March, prompting demonstrations by transport drivers. Several departments became violent as these spread across the country. Likewise, rising fuel costs in Paraguay have sparked protests since March. High fuel prices have prompted truck drivers in Brazil to strike.

In addition, the perception that governments are taking action to remove protections from rising fuel costs has long been a catalyst for protests. Liquified petroleum gas (LPG) prices were increased by the state in January 2022, leading to unprecedented large-scale protests in Kazakhstan that were quickly hijacked by political leaders. Globally, citizens will be watching the response of their governments as gas prices rise. More unrest is likely in the coming weeks and months as a result of policy announcements such as the removal of fuel and power subsidies.

The Situation in Europe

The rising cost of energy will affect countries across the Middle East, Africa and Latin America, even though some commodity exporters may benefit. Europe, however, is particularly vulnerable to disruptions of its energy supply from Russia. About half of the countries in the EU (mostly in Central and Eastern Europe) import more than 50% of their gas from Russia, which is highly dependent on Moscow for hydrocarbon imports. In the event that the EU adopts more draconic energy sector sanctions (banning oil imports), and Moscow retaliates by cutting off gas supplies, protests will become more likely. Gas transiting through Ukraine is likely to be disrupted further, as it has already cut off the gas supply to Poland and Bulgaria.

It is also possible for civil unrest to erupt in Hungary due to energy security concerns and price spikes related to those concerns. A price cap on fuel and electricity that was set to expire on 15 May has been extended to 16 November. As of late April, Hungarian fuel price comparison provider Holtankoljak estimated that free market prices would likely be around HUF 591 (EUR 1.54) for a liter of petrol. Riots are likely to occur as a result of this policy in two ways. In the first case, lifting the price caps would negatively impact living expenses, resulting in public dissatisfaction. Furthermore, price caps on food have already caused supply shortages, which will likely extend to fuel as well. Due to insufficient margins and government support, a significant share of petrol stations will be unable to operate throughout June, according to an association that represents petrol (gas) stations.

Global Impact: Supply Continues to Drop

As central banks ramped up their fight against inflation last month, supply issues return to the fore in September. The OPEC+ meeting at the beginning of the week determines the near-term fate of oil prices, while the global gas industry gathers in Milan to consider the pressures caused by Russia’s invasion of Ukraine and soaring fuel prices. Agricultural and power markets are on high alert for extreme weather, including hurricane season and soaring temperatures in California. Among the top grain exporters, Australia will update its crop forecast soon.

Supply Disruptions in China Amidst Other Factors

Trade figures on Wednesday will provide a checkup on the health of China’s commodities imports, which are recovering from their own historic drought. There are several factors complicating the release of the data, including the power shortages, the property market crisis, and the Covid Zero rulebook thrown at Chengdu. The data on China’s imports for August should provide insight into the direction of metals prices. Despite the government’s commitment to spend more on infrastructure, there are questions about whether it will be enough to offset the impact of virus-related curbs on economic activity and a teetering real estate market. The first week of September’s purchasing managers’ indexes shows that there were some grounds for optimism that the economy has at least bottomed out. While steel production continued to decline in August, the pace of decline slowed sharply and, locking down notwithstanding, China is now entering one of its peak construction seasons. Trade data will be analyzed to determine if overseas demand for items like iron ore and copper has increased.

Eastern-Europe Tensions Directly Impact Global Conditions

Supply chains will be impacted further as the conflict in Eastern Europe continues to unfold. Food prices may rise by 20% as a result of the current conflict in Eastern Europe, according to FAO. The FAO food price index reached a new high in February, and experts worry it will continue to rise. If food insecurity continues to rise, further inflation may be triggered, and consumer habits may change, as consumers may become less willing to spend their money. Some of these changes are being felt today by the US and Europe. Alternatively, key countries may release more crop supplies, lowering food insecurity and inflation.

As for semiconductors and chips, some companies, such as Tesla, are rethinking how they produce them based on consumer demand and supply. Furthermore, Covid continues to disrupt global supply chains in a substantial way. COVID-19 outbreaks and renewed lockdowns result in pockets of improvement, only to be followed by setbacks when key sites experience outbreaks and setbacks, such as in China recently.

Currently, it is not possible to predict what the conflict in Eastern Europe and supply chain bottlenecks and sanctions will do to economies, prices, and supplies. While global disruptions remain ever-present, it’s more crucial than ever to keep track of the supply chain and gain end-to-end visibility. The business continuity plans of many companies include assessing the immediate risk from suppliers in Ukraine, Russia, and neighboring countries, as well as the second-order effect of suppliers. Aside from these decisions, many new import/export restrictions and government policies are being implemented to move supplies in and out of the affected area.

Global logistics disruptions and volatility have exacerbated component shortages across all modes of transportation (air, ocean, rail, and courier). The virus outbreak, climate change and geopolitical situations have caused a domino effect that has resulted in a significant increase in prices. Currently, demand is outstripping supply, and manufacturers cannot support orders with short lead times. The average order backlog is three to four months, while the average backlog for automotive grade Multilayer Ceramic Capacitors (MLCCs) is five to six months.

As evidenced by the latest price and supply indicators from S&P Global, cost pressures and supplier shortages at manufacturers worldwide continued to ease in August. Prices increased at their lowest level in two years, as cost pressures moderated across the vast majority of commodities monitored by the survey. All metals commodities also declined for the first time since May 2020. The Ukraine war continued to impact energy markets, bucking the wider trend and increasing costs on the month.


Outlook for the Near Future

According to a report by Supplyframe, a global electronics value chain intelligence platform, semiconductor shortages are expected to continue until the first quarter of 2023, affecting the production of technology-dependent products such as automobiles. For many component categories, manufacturers can expect severe supply constraints and cost inflation pressure in 2023. What happens if a product is scarce yet indispensable? The price of goods skyrockets, lead times increase, and provision costs increase. Manufacturer margins may suffer as a result.

Despite continued strong demand, the global supply chain remains tight, and manufacturers have difficulty managing the mix and continuing bottlenecks in specific product families. Despite most suppliers’ factories running at almost full capacity, there are still some manufacturers further constrained by the spread of COVID-19.

Various industries, including automotive, 5G and wireless, and IoT, are expected to continue to drive the growth of semiconductor consumption, with the automotive market, which remains the most talked about business vertical, continuing to grow. For most suppliers, this market will be critical to achieving substantial revenue growth in the future. In the supply chain industry, uncertainty is expected to persist until at least 2022 – and in the case of the global chip shortage, until 2023 – as backlogs are cleared, and demand is met.