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.
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.