Sanctions on Russia could disrupt supply chains; auto industry feels the pinch

Sanctions on Russia are likely to disrupt supply chains across the globe, as it is a supplier of key commodities other than crude oil and gas.

Sanctions on Russia are likely to disrupt supply chains across the globe, as it is a supplier of key commodities other than crude oil and gas. The disruption in supplies since the last week of February has already pushed up commodity prices for most automakers in India. The country is a significant producer of cheap aluminium, titanium, uranium and even neon gas, which is used in the manufacture of semiconductor chips used in automobiles. 

Russia and Ukraine are key major suppliers of neon gas and this disruption in its supplies will further impact production of automobiles in India. Prices of key raw materials consumed by the auto industry like rhodium, palladium, aluminium,  nickel, steel, plastic and copper were up anywhere between 0.5% and 10% in the last week of February compared to the previous week.

According to Credit Suisse, chips supply and commodity costs, both key negatives from last year, are emerging concerns again following the Russia-Ukraine conflict. The brokerage said: “Russia-Ukraine region is one of the key sources for Neon gas, which is used in the manufacturing process for the kind of chips used in autos. We believe suppliers have been diversifying and building some stock but will have to watch closely for any deterioration in chips supply further”.   

The market’s focus so far has only been on oil and gas supplies from Russia, on which several NATO allies are heavily dependent. This gives Russia a far greater leverage compared to its Western allies, as these economies can ill afford to disrupt supplies and risk cost escalation.

However, the supplies of other commodities can have an equally crippling effect on global supply chains, say analysts. Aluminium prices are highly sensitive to supplies from Russia, as one of the world’s largest producers of the commodity, Rusal, has key plants in Russia. One company from Russia accounts for 30% of the world’s supplies of Titanium. The company VSMPO–AVISMA accounts for 65% of titanium consumption of Airbus and 35% of Boeing’s. 

According to the senior sovereign analyst, Hassan Malik, at Boston-based LS Loomis Sayles,  “Looking beyond the obvious areas like oil and gas while considering geopolitical dynamics reveals significant Russian leverage over global — and especially Western — supply chains. Crucially, we believe such leverage is asymmetric, with the potential to hurt Western businesses, workers and consumers far more than they would Russian interests. While the direct financial footprint of both Ukraine and Russia is clearly small, we believe the risk of another global supply chain shock with attendant implications for global growth is material and should not be overlooked.”

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