Russia-Ukraine war will drive further supply chain issues and higher costs for logistics operators

Oil prices have jumped in response to Russia’s attack on Ukraine. Russia is the third-largest oil producer and inventory levels are low due to the impacts of Covid, the lack of capacity means that any disruption to supply will have an impact on prices.

Elevated fuel prices will not be the only factor driving higher transportation costs. Distribution firms and shipping companies will face increasing container pricing. The cost of shipping or air freight will increase significantly as sanctions will impact on China-Europe rail freight that travels via the New Silk Road trade routes that traverse Russia and Belarus and thus raise demand for alternative transport modes/routes.

Rising energy prices

Aside from higher transportation costs, the war will also push energy prices higher. Russia is the largest supplier of natural gas to Europe, providing around 35% of the regions supply. Russia has already reduced gas exports to Europe and may decide to further restrict them in response to sanctions. Natural gas is important for electricity generation and higher gas prices will be reflected in higher electricity costs for manufacturers, distribution firms and retailers who rely on this energy to power their warehouse facilities. Energy prices were already rising sharply and this new crisis may prompt greater interest in green energy and onsite power generation and storage as a way to reduce reliance on grid power and shocks to fuel prices.

Strain on supply chains

The Russian invasion of Ukraine poses a new threat to commodity supplies and pricing and will have a ripple effect across global manufacturing and supply chains in 2022. Many British manufacturing firms have suppliers located in Russia and in Ukraine, whether they are direct tier-1 relationships or indirect tier-2 or 3, firms will be looking at ways to broaden their supplier base and hold additional stock to protect their order books. Supply disruptions will trigger price increases for manufacturers and will impact various sectors, including aerospace and automotive as well as the production of semiconductors, batteries, and some medicines.

Labour market constraints

Aside from supply chain issues and associated inflationary pressures, operators also face labour market constraints and upward pressures on wages. This too is impacting on operating costs and will also contribute to higher output prices from manufactures and higher shipping / delivery charges from parcel carriers and freight forwarders.