Just as global supply chains were showing signs of recovery they face a new threat from Russia’s invasion of Ukraine, says Moody’s Investors Service.
In a new report, the rating agency said the escalating Russia-Ukraine conflict poses fresh risks to global supply chains, which will hamper economic activity and continue to fuel inflation.
The conflict is seen threatening supply chains “mainly because of soaring energy prices and suspended trade routes, but also because of related risks: input material and component shortages, higher priced transportation and key commodities and disrupted cargo flows,” the report noted.
Not only will higher energy prices boost the cost of manufacturing, but it’s also expected to increase freight costs, it said.
“With major container lines suspending calls to Ukraine and Russia, congestion may increase at other European ports as container vessels are rerouted to less direct and more costly routes to avoid the Black Sea area,” it said. “The work-arounds will likely prolong deliveries in the coming weeks and pressure freight rates higher.”
Additionally, air freight operations are complicated by the closure of critical airspace, “forcing longer routes and delaying air shipments especially between Europe and Asia,” Moody’s said.
Certain industries, such as auto production, could be impacted too, if the supply of inputs from both Russia and Ukraine, including metals and gases used in the production of semiconductors and other parts, is disrupted for an extended period.
Raw materials from the region, including neon, palladium, aluminum and nickel, are key to producing electric vehicles, it noted.
“Production at German car factories that rely on made-in-Ukraine components, such as wiring harnesses, has already halted,” the report said.
Fortunately, these disruptions are expected to have limited effects on large chip manufacturers in Taiwan “because of their robust inventories and diversified component procurement,” the report said.
Nevertheless, the new risks to global supply chains are developing just as they were “beginning to recover from the disruptions of Covid-19,” Moody’s said.
While supply chains hadn’t returned to pre-pandemic conditions, “constraints were stabilizing before the conflict escalated,” it said.
Global factory activity had picked up, semiconductor shipments increased, and supply delivery times were shrinking in most major economies, it said.