Disruptions caused by the Russia-Ukraine conflict have blunted hopes that global supply-chain pressures could ease anytime soon. The resulting shockwaves have not only undercut the healing dynamics that Citi economists expected to emerge in the months ahead, but have also generated a broad set of potentially powerful new forces. Complicating the stresses is the recent upsurge in Covid cases – particularly in Asia.
Energy markets have been on tenterhooks due to the conflict. More broadly, volatile energy prices have already caused production challenges in a range of industries, especially in Europe.
There is evidence too of potential supply-chain pressures beyond energy. For example, Ukraine is a significant exporter of neon gas – used in the production of semiconductors. Further, Ukraine also is an important producer of automobile cables. With exports of these cables now disrupted, auto production in Germany is starting to feel a squeeze.
More broadly, Russia and Ukraine are key global exporters for a range of commodities, many of which have seen an upsurge in price volatility. Taken together, the two countries are the largest exporters of wheat, processed nickel, and fertilizers. They are the second-largest exporters of lumber, refined copper, steel, ammonia, and titanium. And the third largest for aluminum, coal, and gas turbines. As the conflict persists, the availability of at least some of these materials is likely to be threatened.
The first chart below is the Citi Global Supply Chain Index. During the first two months of the year, the index retreated a bit further from its autumn peak, but it continued to point to notable pressures in global supply chains.
The second chart shows the three underlying components of the global index – transport costs, global PMIs, and inventory pressures. Of the three, the global PMIs component registered a modest further drop over the past two months, as suppliers’ delivery times improved a bit. Transport costs and inventory pressures essentially just moved sideways. Container shipping costs from China to the U.S. West Coast troughed during the first half of January and have recently edged back up. As a more encouraging development, however, the number of container ships waiting off the coast of Los Angeles and Long Beach has fallen by half from the early-January peak (this variable is not directly included in the above index).
Even before the Russia/Ukraine conflict started, two key elements of Citi economists’ hopeful narrative were under duress. First, improvement in supply chains requires some meaningful progress managing the pandemic, but the upsurge in Omicron cases in recent months created challenges. Second, a moderation in energy prices is a key element needed to help blunt high shipping and production costs. But oil prices, which were on a sustained upward path through the first two months of the year, were not cooperating. While much of this rise was a geopolitical risk premium due to fears regarding Russia’s troop build-up, the underlying market also seemed tight.
The full Citi Research report extends the analysis of supply chain pressures in two further directions. Firstly, Citi economists calculate regional supply-chain pressures indexes for the United States, the euro area, and Asia.
The first chart below shows that regional indexes are highly correlated, both among themselves and with the global index. As such, supply-chain disruptions really are global in nature. The same basic shock is being transmitted to countries around the world; however, given each country’s unique economic structure, the implications of the shock have varied significantly from region to region and country to country.
As a second extension, Citi analysts consider the correlation between supply-chain pressure indexes and consumer price inflation. See the full report for more on that.
Taking a step back, the private sector has been resilient in the face of some severe shocks. For example, the onset of the pandemic created economic pains, but firms were flexible in adjusting the ways that they did business and adapted to the new environment. In response to the current challenges, firms will be looking for alternative suppliers, potential substitutes for goods that are in short supply, and alternative production techniques to minimize their exposures to the shortages. Such efforts will not eradicate the challenges but could soothe some of the disruptions.
Finally, government policies may also be a stabilizing factor. For example, targeted financial support to households to defray rising energy costs would help blunt the transmission of the shock into the macro-economy and, thus guard against a slowdown in real GDP growth. Such initiatives are now being considered, especially in some European countries. In addition, many countries have strategic reserves of oil and other raw materials that could be released to help buffer shortages that arise. In early March, the US and its allies announced the release of 60 million barrels of oil, half of which will come from the U.S. Strategic Petroleum Reserve. Similarly, China has a massive reserve of wheat that could be used to ease pressures on food availability that may arise.
For more information on this subject, please see Global Economics - Global Supply Chain Pressures—Poised to Intensify Further
Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.
