Supply Chain Disruption
Just when the global economies were
slowly recovering from the catastrophic effects of Covid pandemic, The
disruption in Supply chain got intensified due to the ongoing Ukraine-Russia
War and the recent lockdown in China. The impact of the war, covid crisis and
rising inflation in the US has also provoked the decision of US Federal Reserve
to raise interest rates by quarter percentage point for the first time since
2018.
A disruption in supply chain have led
to increase in food, utilities and automobile sectors causing hardships for
lower income individuals in the US. Although, maximizing employment and keeping
inflation under control has been the main objective of the Fed Reserve, the job
market has made a magnificent recovery but the inflation rate has risen the
highest in 40 years. “Further six more increase in interest rates are projected
by the Fed this year” said the President of St. Louis Fed. Raising these rates
rapidly may lead to another recession that will have impact around the whole
world.
Since the invasion in Ukraine, major
economies excluding India have imposed various sanctions on Russia. Despite US
warning India to distance from Russia, India continues its import of rough diamonds
from Russia after a pause and to avoid sanction related problems, payments are
made through German Banks in Euros with a delay of 2-3 weeks due to SWIFT ban
on Russia. According to the US treasury, 30% of the rough diamonds in the world
comes from Russia and sanctions on the world’s largest group in diamond
exploration and mining known as Alrosa Group of Russia has affected the diamond
business in India as 10% of Alrosa’s rough diamonds are imported by India. As
US is the biggest buyer, the demand for diamonds is decreased impacting India’s
export of polished and cut diamond due to ongoing war.
The disruption in supply chain has flown
the demand and prices of commodities such oil, cars and computer chips around
the globe. Due to shortage of semiconductor computer chips, General Motors and
Ford Motor have halted their production for two weeks at its North American
plants. Although, Russia and Ukraine do not manufacture these computer chips
but Ukraine is the major supplier of Neon gas which is used for lasers in the
process of chip making. However, there are concerns on the availability of this
gas due to the war and many chipmakers have already stockpiled neon gas.
New fresh covid cases in major
market-based cities in China has also created a problem for the automakers. Tesla,
Toyota and Volkswagen have put a halt on its production due to Covid lockdown
in the country. Due to shortage of semiconductor, only fewer Volkswagen cars
could be sold in 2021 and Russia-Ukraine war has also created trouble for the
supplies of raw material such as aluminum, nickel, neon, and palladium with shipping
routes disruption and sanctions imposed on Russia. Volkswagen has warned that
the auto industry will face more disruption in supply chain in 2022 due to
prices of raw materials soaring as China, Russia and Ukraine play important
role in supply chain for the industry.
Cargo Ships are gathering at Shenzhen
port of China, one of the world’s busiest ports. Due to lockdown in the city,
the cargo operations are temporarily closed and for the operations “You need
people to move the products to and from warehouses by trucks. No people mean no
trade” said Business Analyst of CNBC. The supply chain disruption was twice the
size of obstruction of the Suez canal when the port was completely shut down
last year due to covid lockdown. The city of Shenzhen is home to major tech
giants such as Huawei and Foxconn, the iphone manufacturer. The impact of this
lockdown may cause more impact on the supply chain.
Due to lockdown in China, prices of
Brent Crude Oil have started to lower down which recently soared above US$ 139
per barrel because of ongoing Russia-Ukraine war. However, to avoid negative
impact on fluctuating crude oil prices, India is currently importing oil from
Russia at a discount of US$ 35 per barrel. Import of Crude Oil in the march,
2022 is reported to be four times higher than the corresponding time of the
preceding year. Import of crude oil from Russia stood at 360000 barrels a day
in just half of the month of March. The majority of the purchase has been made
by Indian Oil Corporation.
Indian exporters who mainly export
chemicals, steel, tea and pharma products to Russia have approached government
authorities and the RBI as millions of dollar payments are stuck due to SWIFT
ban and other sanctions on Russia. Most of these trades are supported by Letter
of Credit (LC) issued by Russian banks and due to uncertainty of payments the
Indian exporters are facing cash flow problems. Exporters have requested the
government for trade subsidies for the requirement of working capital. Russian
Central Bank has proposed rupee-ruble payment messaging system called as SPFS for
funds transfer. It will be an alternative to SWIFT as banks trading in dollars
with Russia through SWIFT will be settled in New York can be hit hard by hefty
fines and offenders can also be jailed.
Under SPFS, Russian currency ruble
will be sent to Indian banks and the same will be converted into Indian Rupees
and vice versa. It is still undecided, whether the exchange rates should be
floating or fixed. The decision will soon be taken by the Indian government to
continue its trade with Russia. India will be testing US and EU’s tolerance if
it goes ahead with accepting Russia’s proposal for using SPFS. India had also
considered setting up payment system with Sri Lanka who are into major economic
crisis. Since the foreign reserves of the island nation has shrunk, the new
payment system will allow the importers and exporters to make payments in
Indian & Sri Lankan rupees. The decision is yet to be taken because the
island nation has decided to default on its foreign debt of US$ 51 billion and
has also suspended its further debt servicing for procuring essential
commodities as it battles its worst Financial Crises since 1948. Following this
Moody has cut Sri Lanka’s credit rating from Caa2 to Ca. To know more about the
Sri Lanka’s Economic Crisis, please click the link https://www.sjfinancial.co.in/blogpost.php?id=3
Being the world’s most populous
country, China is second largest market-based economy after USA. It ranks
number 1 in total exports and number 2 in total imports. Russia & Ukraine
also play an important role in global supply chain as both the countries are
huge exporters of Crude oil, Diamonds, Grains, Fertilizers, etc. The potential
conflict between countries and the fierce of new covid variants is reshaping
the supply chain. The reshaping may impact splitting the trade lanes, supply of
goods and currency system managed by financial institutions. Companies should
pursue strategies and should stress test to make them more flexible to avoid
risks related to supply chain disruption.
Climate change has also become long term dire matter for the disruption in supply chain. A series of natural calamities around the globe such as floods in China forced closing of automobile plants and its supplies, Typhoon in Malaysia caused a break in supply of semiconductor supplies routing from Taiwan, Heavy rainfall and melting of snow in the Europe region has increased the water levels of the rivers impacting river shipping and forcing to load less capacity of the goods onboard, Wild fires in Canada triggered major heatwaves in the North and choking transportation. Scientists warn that these climate changes will be intensified in the coming years that will threaten the shipping lines, rail and highway routes across the Globe.
References:
https://amp.theguardian.com/business/2022/mar/16/us-federal-reserve-interest-rates-inflation
https://theloadstar.com/new-shenzhen-lockdown-will-hit-supply-chains-harder-than-suez-disruption/
https://www.telegraphindia.com/business/crude-oil-dips-on-rising-covid-cases-in-china/cid/1856207
https://hbr.org/2022/03/how-the-war-in-ukraine-is-further-disrupting-global-supply-chains
https://theconversation.com/ukraine-why-china-is-not-yet-bailing-out-russia-179403
https://edition.cnn.com/2022/03/30/business/global-supply-chain/index.html
https://www.greenbiz.com/article/how-climate-change-disrupting-global-supply-chain