Ukraine crisis impact on freight and global supply chains

Ukraine crisis and the impact on global supply chains

Ukraine crisis and the impact on global supply chainsUkraine crisis impact on freight. The war in Ukraine is expected to have a domino effect on freight and supply chains, as global companies close factories during the Russian invasion and the price of oil soars. We are already seeing the impact of airspace bans.

Although inconsequential compared to the humanitarian situation, unfortunately the supply chain disruption and freight impact of the crisis can’t be ignored by logistics professionals across the world.

Aeroflot russian airlineAir Freight –

The Airlines responsible for moving around 20% of the world’s air cargo are being affected by airspace bans.

Transport between Europe and north Asian destinations like Japan, South Korea and China are disrupted and subject to cancellations. Due to reciprocal bans barring European carriers from flying over Siberia and preventing Russian airlines from flying to Europe.

Asia-North America cargo routes are expected to be less affected than European routes, because many carriers already use Anchorage, Alaska, as a cargo hub and stopover point.

Major Asian carriers like Korean Air Lines and Japan’s ANA Holdings are still using Russian airspace, as are Middle Eastern airlines.

The war has sent the price of oil above $100 per barrel, and the extra fuel burned on less direct routes will come at a higher price. The price of jet fuel increased 3.8% to $111.13 per barrel last week and is up nearly 60% in the past year, according to the International Air Transport Association.

Longer routes will add time and cost as carriers avoid airspace around Russia, as well as Ukraine, Belarus and Moldova, to avoid the possibility of accidental missile strikes.

Virgin Atlantic said avoiding Russia would add 15 to 60 minutes on flights between the U.K. and India and Pakistan.

MaerskSea freight –

Three of the world’s largest container shipping companies say they are suspending nonessential deliveries to Russia – Maersk, said all new bookings to and from Russia will be temporarily suspended, with exception of foodstuffs, medical and humanitarian supplies.

Maersk announced a full suspension of bookings to or from Ukraine, Hapag-Lloyd, CMA CGM and MSC are also avoiding Ukrainian ports. Most container ships are now diverted to the Romanian port of Constanta, Tripoli or Piraeus.

With many ports operating already crowded, the first container jams have already been reported in Greece.

Britain and Canada have closed ports to Russian ships from March 1. Britain banned any ship with Russian connections from entering its ports, and other countries are likely to do the same.

Ukraine road bridgesRoad freight –

Most borders are closed for outward traffic – all Ukrainian checkpoints on the border with Russia, Belarus and the Transnistrian segment of the Ukrainian-Moldovan border are closed.

Hauliers have been advised not to travel to Ukraine via Europe, effectively halting road freight transport into the country.

Rail freight –

Ukrainian Railways have terminated all relations and interaction with JSC Russian Railways, and Railfreight have reported that the railway line between Ukraine and Russia has been completely destroyed. This affects the New Silk Road coming to Europe via China’s East coast, as it runs through Russia and Ukraine. Therefore container transport via that route has ceased.

Train connections from the EU to Ukraine and back are theoretically possible to run, but military actions make them uncertain and therefore a risky choice.

Ongoing effects of the war

Ripple effects on freight include longer transits, fewer freighters, hike in fuel and shipping prices.

Ukraine and Russia are both big players in the air freight business due to their strategic position between Western Europe and South East Asia.

Antonov cargo plane UkraineUkraine-based Antonov Airlines is continuing some operations with five AN-124 super-jumbo jets, but the world’s largest cargo aircraft, the An-225 Mriya, has been destroyed during a Russian attack. The An-225 is a six-engined behemoth built by the Soviets in 1985, it was capable of a maximum take-off weight of 640 tonnes. By contrast, the freighter version of the Boeing 747-400 has a maximum take off weight of 450 tonnes.

Western companies also have lost access to Russian cargo specialist Volga-Dnepr, which operates a dozen AN-124s and five Ilyushin-76 freighters, and its Boeing 747-dominated subsidiary AirBridgeCargo because of airspace and banking sanctions against Russian companies.

In the coming months the An-124s will become unable to fly because they rely on being serviced by Antonov in Ukraine.

So the primary losers are shippers with heavyweight and outsize cargo, any goods that don’t fit easily into regular cargo jets.

For very heavy items the Antonov was often the only air freight option available and these planes are especially critical for the energy sector, for transporting items such as turbines and transformers.

Russian sanctionsSanctions imposed on Russia are expected to further disrupt global supply chains.

US-based United Parcel Service and FedEx Corporation, two of the world’s largest logistics companies, have halted deliveries to Russia. Deutsche Post said its DHL unit was halting inbound shipments to Russia

The sanctions are a double-edged sword. Food prices will surge not just in Russia, but in Europe as well. Ukraine and Russia together account for nearly a third of the world’s wheat market. And, as Reuters reports, Russia and Ukraine also make up about 19% of world corn supply, and 80% of sunflower oil exports.

Countries such as Yemen, Libya, Lebanon, Sri Lanka and Sudan are heavily reliant on Ukrainian grain, and even a short-term delay in supply may have drastic consequences.

Container shipping

The impact of sanctions could result in thousands of stranded containers at Russian ports. Along with additional concerns that Russian shippers might suddenly not be able to pay their freight invoices due to Russian banks being denied access to SWIFT. This in turn will create problems in other places.

Oil Shipping Costs Soar

According to Bloomberg, an anonymous shipbroker has said that Shipowners are offering at least double the last transacted rate to carry so-called ESPO crude from Kozmino, which loads oil from Russia’s Far East, to ports in China.

The sanctions on Russia will see more oil purchased from the USA, Saudi Arabia and Iraq.

Big companies are seeking year-long freight rate agreements. Hellenic Shipping News reports IKEA and Wallmart are due to negotiate year-long agreements. The average price for the transport of a 40-foot container from China to the USA’s West Coast is likely to be in the region of $7,000 and $8,000. This is said to be a record high for such an annual agreement, and is more than the 2020 average of around $5,500.

Manufacturing

It will also become difficult to source many raw materials used in global manufacturing processes. Russia’s supply chains and manufacturing industries will also suffer, potentially seeing some factories in the country grind to a halt.

David Feldman, a professor of economics at William & Mary in Virginia, told AP News:

“It’s going to ripple through their economy really fast. Anything that is imported is going to see the local cost in currency surge. The only way to stop it will be heavy subsidization.”

Materials

According to Gartner’s Sarah Hippold, the conflict will result in “severe shortages of hydrocarbon, critical minerals, metals and energy”.

Including the price of metal, Russia has around 10% of the world’s copper reserves, it is also one of the main producers of nickel and platinum. Nickel prices are already the highest they have been in over a decade and amount to approximately 25,000 dollars per ton. The price of palladium has also been rising recently after being on the decline for several months. Russian exports of palladium account for as much as 45% of global production.

The metal is used in the automotive industry for the production of catalytic convertors, as well as in the production of integrated circuits. A suspension of exports via sanctions would therefore deepen the microchip shortage.

Oil and gas prices

Reuters reports that oil prices have risen above $100 a barrel for the first time since 2014. It is also expected that the conflict will see gas prices rise – especially if Russia cuts its supply to Europe.

Naturally, this means higher energy and fuel costs, which shall generate yet more inflation and transportation costs.

Supply chain impact

Data from the supply chain research platform Interos shows that around 1,100 US companies and 1,300 European countries have at least one direct supplier in Russia, while around 400 companies in each region have key suppliers in Ukraine.

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