Impact of War in Ukraine on Global Supply Chain
RedStone Resource
March 10, 2022
Inside This Edition
China’s Manufacturing Sector Jumps Back to Life
After nearly 45 days of disruptions from the Lunar New Year and hosting the Olympics, Chinese manufacturing and supply chain activity has restarted. The manufacturing PMI for the country came in at 50.4 in February, up from 49.1 in January and now in expansion territory.
US Manufacturing Ticks Up in February
US manufacturers were finding their footing after a disruptive January full of weather and COVID disruptions. The Markit US manufacturing PMI came in at 57.3 in February, up from 55.5 in January. This was a strong showing and significant upturns in production and output improved conditions in February.
Shipping Firms Starting to Turn Their Eyes to West Coast Labor Negotiations
A contract renewal process is to get underway on the US West Coast between the International Longshore and Warehouse Union and the Pacific Maritime Association. The current contract is expected to “expire” (if there are no extensions and other provisions passed prior) by July 1st.
ECONOMIC BRIEFING
Impact of War in Ukraine on Global Supply Chain
The first and foremost risk in the supply chain will come from higher fuel prices. Brent North Sea crude was trading at $103 a barrel while US West Texas Intermediate was over $100 a barrel for the first time since 2015. The national average price for diesel in the US has hit $4.00 a gallon and Europe just set new all-time highs for diesel prices. DAT is still showing fuel surcharge prices 38% higher Y/Y prior to this oil price spike.
Secondary risks are coming through certain trade lanes. The spot price for leasing a container on Asia to Europe trade lanes has just hit $40,000 a container on some lanes, up from $2,500 a container prior to the pandemic. Shipping in and out of the Black Sea has now been cut off and goods leaving Ukraine have been completely shut off.
Cyber security issues have also started to hit some significant manufacturers and at least one global logistics firm. Toyota announced that it was temporarily halting all production in Japan because of cyber attacks on major suppliers. They were able to restart production within 48 hours, but cyber risk continues to be high around the globe.
Overall, the impact to the US supply chain is expected to be small in comparison to what is hitting Europe. But to say that there is no impact would not be accurate.
US Business Investment Hits New Record High
A key barometer of business investment and spending hit a new record high in January, hitting an annualized rate of $79.9 billion. This was 10.5% higher than January of 2021. Businesses are investing in everything from new technologies that bring efficient automation to increasing capacity. Purchases of revenue equipment across transportation, construction, and manufacturing are increasing supply chain activity by pushing all aspects of the supply chain from upstream input demand through finished goods delivery.
Many companies have attempted to get ahead of potential interest rate increases to expand and upgrade facilities, make big robotics investments, and try to increase productivity through technology. This rate of blistering investment is expected to continue.
China’s Manufacturing Sector Jumps Back to Life
After nearly 45 days of disruptions from the Lunar New Year and hosting the Olympics, Chinese manufacturing and supply chain activity has restarted. The manufacturing PMI for the country came in at 50.4 in February, up from 49.1 in January and now in expansion territory. Manufacturers reported their strongest output in nearly 8 months and new order activity was strong for the fourth month in a row.
COVID disruptions had started to abate slightly in some production regions, although some markets such as Hong Kong were experiencing significant disruptions from lockdowns and quarantines amid a large outbreak of Omicron.
Ports are still congested, but much of that backlog is starting to clear. Raw material shortages could be an issue, China receives a significant amount of core metals from Russia and Ukraine, although they have a diversified supply chain and sourcing strategy that will likely fill many gaps in supply that emerge.
TRANSPORTATION BRIEFING
US Manufacturing Ticks Up in February
US manufacturers were finding their footing after a disruptive January full of weather and COVID disruptions. The Markit US manufacturing PMI came in at 57.3 in February, up from 55.5 in January. This was a strong showing and significant upturns in production and output improved conditions in February.
Manufacturers still reported that they were having difficulties with raw material, component parts, and labor shortages in February. Order demand was stronger than output and backlogs of work continued to grow. But there is a notable improvement in operating conditions for output (improving weather, lower absenteeism, etc.), despite strong inflationary headwinds (which were easing just slightly) pushing back against producers.
Shipping Firms Starting to Turn Their Eyes to West Coast Labor Negotiations
A contract renewal process is to get underway on the US West Coast between the International Longshore and Warehouse Union and the Pacific Maritime Association. The current contract is expected to “expire” (if there are no extensions and other provisions passed prior) by July 1st. The contract covers key ports along the US West Coast that handle approximately 40% of the nation’s freight cargo.
Many companies that would have built contingency plans would have already likely had those in place, but some maritime companies are dedicating additional capacity to Gulf and East coast trade lanes as some shippers work through current backlogs on the West Coast and set up contingencies against potential future delays. This is another risk item to add to the wall of worry as we transition into a post-pandemic period in which the global supply chain should start to sort itself out.
