Expert Commentary

Effects of the Russia-Ukraine Conflict on Construction Supply Chains

Russia's invasion of Ukraine threatens to lead to shortages and price hikes on top of what we're already seeing from COVID-19 and myriad other causes of the current supply chain difficulties.


Subcontractor Performance Risk
March 2022

About 374,000 businesses worldwide rely on Russian suppliers—90 percent of which are based in the United States. About 241,000 businesses worldwide rely on Ukrainian suppliers—93 percent of which are based in the United States, according to Dun & Bradstreet. Exposure of this magnitude will not be without impacts in the construction space. These impacts will largely be felt in three areas: raw materials, transportation, and manufacturing. Obviously, these are important to consider in any subcontracting strategies.

Raw Materials

Commodity price increases and short supplies are likely for the following materials.

  • Aluminum
  • Petrochemicals and plastics
  • Steel
  • Nickel—alloys, stainless steel, batteries, plating, and some glass
  • Timber—felt more in Europe but bound to also affect the US price/supply
  • Copper—cladding, wiring, heating systems, oil/gas lines, rainwater systems, and roofing
  • Tin—solder, plating, and various alloys
  • Rare metals—used in computer memory, automobiles, batteries, fluorescent lighting, etc.

Russia is a major producer of aluminum and copper, materials that had already seen year-over-year price increases in the past 2 years of 33 and 25 percent, respectively. This year, these impacts will be over and above those increases.

Additionally, the existing chip shortage is likely to worsen because Ukraine and Russia produce a large percentage of the world's neon, xenon, and palladium that are commonly used to make computer chips. That impact is felt in HVAC equipment, appliances, etc.

Oil prices impact the price of everything because of its importance to manufacturing, transportation, and other raw materials. Prices are at a 14-year high, and bans on Russian petroleum or the cutoff of Russian supplies exacerbate the situation.

Transportation

Transportation prices have been climbing since June 2020 and have hit record highs over the past year. LMI researchers expect "broad and very strong upward pressure on transportation prices across the supply chain," especially considering these geopolitical events. Some industries are raising prices to compensate, while some are instating energy surcharges.

Contributing factors include the following.

  • Voluntary/strategic suspension of shipments. In addition to the price of fuel/oil, the disruption of trade routes related to the conflict presents its own set of challenges. These impacts are already starting. Cargo ships in the area have been halted or delayed; some flights are being canceled or rerouted, putting pressure on cargo capacity and raising concerns about further supply chain disruptions and opening up additional risk around global supplies of various products. Early this month, the shipping giant Maersk announced that it would temporarily suspend all shipments to and from Russia by the ocean, air, and rail, with the exception of food and medicine. Ocean Network Express, Hapag-Lloyd, and MSC, the world's other major ocean carriers, have announced similar suspensions.
  • Bans affecting the supply chain. Western Europe and Russia have both imposed reciprocal flight bans, bringing transport between the two regions to a halt. The White House also recently banned Russian flights.
  • Closed ports. Shipping ports around the Black Sea have closed, meaning dozens of cargo vessels are at a standstill. Air shipments that traditionally pass through Russian airspace now must divert and take longer (slower/more expensive) routes. Longer trip times could cause delays and backlogs for industries that depend on air freight and ocean transport.

Manufacturing

Physical peril and supply chain challenges will inevitably result in the shuttering of some factories in Europe, Ukraine, and Russia. Alternative suppliers are an answer in some cases but come with challenges of their own. Russia and Ukraine lead the global production of the metals discussed above and are the main supplier of metals for Europe; alternate sources including South America, China, or Japan are geographically distant, meaning potentially increased cost and time to procure materials in some cases and additional cost increases overall.

That said, sometimes alternative suppliers are not as available. Approximately 90 percent of neon, which is used in chip manufacturing, originates from Russia, and alternative sources are not readily available.

Subcontracting Strategies

For builders, it's important to have an awareness that subcontractors who are locked into lump-sum contracts may not be able to bear these impacts alone. It is critical that the industry works together to help them succeed. In many cases, it's better to collaborate than to default a struggling subcontractor because the next subcontractor in line will almost certainly face the same supply chain and cost challenges.

Strong financial prequalification of subcontractors is highly important in this situation and allows builders to understand their ability to be resilient in the face of these challenges. It's also wise to ensure initial and ongoing conversations are happening with subcontractors (and suppliers). Those conversations allow builders to acquire an awareness and perspective on potential issues that they otherwise might not hear; they should really listen to what subcontractors are worried about and discuss any potential solutions they may be aware of. There is no failsafe solution to this complex challenge, but communication and collaboration are critical components of the most likely path to success.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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