Commodity inflation 'inevitable' as Russia invades Ukraine

Oil prices have hit a seven-year high following Russia's invasion of Ukraine and analysts warn supply chain disruptions caused by the conflict could drive inflation up to 10%.

Oil prices have hit a seven-year high following Russia's invasion of Ukraine and analysts warn supply chain disruptions caused by the conflict could drive inflation up to 10%.

Brent crude oil surged by 7% to reach $103, the highest levels since August 2014, after Russian president Vladimir Putin announced an invasion of Ukraine. Russia is the world’s second biggest exporter of crude oil, and the largest exporter of natural gas.

The Centre for Economics and Business Research (CEBR) warned: “International action will likely not only add to the current inflationary binge, possibly bringing inflation close to 10% in the main western economies.”

Wheat prices hit their highest levels since 2013, with 10% of the world's wheat grown in Ukraine.

The country's steel makes up around 10% of Europe’s imports, and Ukraine is a significant producer of uranium, titanium, iron ore, steel and ammonia. 

The escalation of the conflict in Ukraine is raising concerns that European reliance on Russia for its natural gas could add to already high inflation levels, and CEBR warned economic sanctions placed on Russia could “cause a much more serious spike in energy prices”.

Chris Rogers, principal supply chain economist at freight forwarding company Flexport, told Supply Management: “Conflict leads to uncertainty. That is inevitable.”

He said oil prices had gone up “significantly” as a result of the conflict, but said high prices for commodities as a result of Covid-19 and supply chain disruptions meant “incremental fuel cost might not be as visible as it might have been in the past”.

Rogers explained while availability of bunker fuel – used by ships – may not be restricted by the conflict, such fuel costs are increasing due to the rising oil prices, raising costs along the logistics supply chain.

Rogers said Europe must seek to diversify its supplies of natural gas – it currently gets around 46% of its gas from Russia – through alternative sources, including liquefied natural gas (LNG). Research by Flexport found the European Union only used two-thirds of its LNG import capacity in January.

“The question is whether over the mid term, Europe can replace Russian gas with imports from the rest of the world. That is possible to a certain extent, but calculations would suggest only about three quarters of Russian gas could be offset by LNG, even if everything works properly,” Rogers said.  

Russia’s invasion of Ukraine has highlighted the need for procurement teams to prioritise transparency within their supply chains to manage disruptions. 

Rogers continued: “Procurement teams have to really take a hard look not just at their direct procurement during this conflict, but also their indirect procurement. So you might say, 'I make beer in the UK, why do I care about this?' Well, if your can supplier is using Russian aluminium, then that's going to be a problem for you. 

“Supply chain and procurement managers need to be investing in visibility. Where are your shipments? Where are they coming from, and where are your suppliers' suppliers' situated?

“This is just one extra complication corporate supply chain managers didn't need right now.”

Alistair Baxter, head of receivables finance, at fintech company Taulia, warned the conflict was putting extra pressure on supply chains rocked by Covid-19 disruptions.

Baxter said: “The news today of the incursion into Ukraine by Russian forces will concern business leaders who are already grappling with stressed supply chains. 

“Every industry since the onset of the global pandemic has been strained, with freight operating at near capacity levels, shipping times lengthened, and inflationary pressure. However, the news today could usher in new issues – and not all of the disruptions will be as predictable as the price of oil going up.”

Baxter warned the biggest threat from the conflict came from “the threat of the unknown” in the form of Russia cyber attacks.

He pointed to the Russian NotPetya cyber attack in 2017 which targeted Ukrainian digital infrastructure, but rapidly spread and brought the operations of major international companies including Maersk to a standstill.

The attack led to over $1bn of economic losses across major logistics companies.