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Ukraine cri­sis cur­rent­ly exac­er­bat­ing

raw mate­r­i­al short­ages in Germany 

27.05.2022   |   Oksana Holovey

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Rub­ber and plas­tics in mod­ern agri­cul­tur­al technology

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Beyond the ter­ri­ble human­i­tar­i­an con­se­quences, the war in Ukraine has also hit glob­al sup­ply chains hard. Pro­duc­tion capac­i­ties in the con­test­ed areas have been impaired, and polit­i­cal sanc­tions are also ham­per­ing trade with Russ­ian sup­pli­ers. This is exac­er­bat­ing the ongo­ing short­age of raw mate­ri­als and pos­ing prob­lems for the man­u­fac­tur­ing sec­tor. The plas­tics and rub­ber pro­cess­ing indus­tries are also affected.

The ques­tion is: How should com­pa­nies respond to this short­age of raw mate­ri­als and what is the way out of the crisis?

The con­se­quences of the con­flict for rub­ber pro­cess­ing companies

The Ukraine con­flict is not only affect­ing the pro­duc­tion of crude oil, nat­ur­al gas, steel and wheat. Rus­sia is also one of the most impor­tant sup­pli­ers to the glob­al rub­ber indus­try. Russ­ian sup­pli­ers of polybu­ta­di­ene (BR) and isobutene-iso­prene rub­ber (IIR) each have dou­ble-dig­it mar­ket shares. In 2021, Russ­ian com­pa­nies sup­plied about 550,000 tons of car­bon black and 240,000 tons of syn­thet­ic rub­ber to the Euro­pean Union, accord­ing to sta­tis­ti­cal data from Eurostat.

Pur­chas­ing can­not replace such vol­umes of raw mate­ri­als overnight. If sup­ply rela­tion­ships are per­ma­nent­ly inter­rupt­ed, sup­ply bot­tle­necks and sig­nif­i­cant price increas­es are to be expected.

At the same time, ener­gy costs are sky­rock­et­ing, as Rus­sia and Ukraine have so far met a large share of Euro­pean demand for oil and nat­ur­al gas. West­ern sanc­tions and dam­age to Ukrain­ian infra­struc­ture are sig­nif­i­cant­ly lim­it­ing this sup­ply. Alter­na­tive sup­pli­ers such as the USA, Nor­way or Qatar can only fill these gaps to a lim­it­ed extent.

The result­ing price increas­es are hit­ting the ener­gy-inten­sive rub­ber indus­try hard and dri­ving up pro­duc­tion costs. Pro­duc­tion loss­es can­not be ruled out either if price increas­es jeop­ar­dize prof­itabil­i­ty and there is a short­age of pro­duc­tion-rel­e­vant raw materials.

War exac­er­bates cur­rent raw mate­r­i­al shortages

The rub­ber pro­cess­ing indus­try has not yet ful­ly recov­ered from the pan­dem­ic-relat­ed raw mate­r­i­al short­ages. The cri­sis in East­ern Europe is fur­ther heat­ing up the sit­u­a­tion on the raw mate­ri­als mar­ket, as sup­ply rela­tion­ships with Ukrain­ian and Russ­ian trad­ing part­ners have been cut off.

In addi­tion, the per­spec­tive has changed. Pre­vi­ous­ly, raw mate­r­i­al short­ages were the result of an imbal­ance between sup­ply and demand, due to the demand peak of a glob­al econ­o­my recov­er­ing from the finan­cial impact of a pan­dem­ic. In such a sit­u­a­tion, sup­pli­ers may be able to ser­vice their cus­tomers’ orders, but not with­in the agreed time­frame. These are deliv­ery delays, not fail­ures. The raw mate­ri­als ordered will arrive as soon as the sup­ply bot­tle­necks have been resolved.

With the cur­rent geopo­lit­i­cal bot­tle­necks, this is not nec­es­sar­i­ly the case. The pro­duc­tion capac­i­ties of Russ­ian and Ukrain­ian sup­pli­ers are unavail­able for the time being. It will take years to rebuild Ukraine’s econ­o­my and infra­struc­ture, and how long the West­ern indus­tri­al­ized coun­tries’ sanc­tions against Rus­sia will last is unclear. This is not a tem­po­rary increase in deliv­ery times. Sup­ply rela­tion­ships have been dam­aged for the long term, at least until the sit­u­a­tion even­tu­al­ly stabilizes.

Far-reach­ing mea­sures are necessary

In the short term, the cur­rent sit­u­a­tion is the same as the pre­vi­ous short­age of raw mate­ri­als dur­ing the pan­dem­ic. There­fore, the coun­ter­mea­sures are also iden­ti­cal: eval­u­ate alter­na­tive mate­ri­als, seek coop­er­a­tion with oth­er com­pa­nies, etc. We have already described cor­re­spond­ing strate­gies in anoth­er blog post.

How­ev­er, dif­fer­ences become appar­ent in the medi­um and long term. The war in East­ern Europe cor­re­sponds to the esca­la­tion of a polit­i­cal trend that has been emerg­ing for years. More and more coun­tries are align­ing their trade and resource poli­cies with nation­al inter­ests and using them as lever­age in geopo­lit­i­cal nego­ti­a­tions. It can­not be ruled out that inter­na­tion­al trade rela­tions will be affect­ed more fre­quent­ly by polit­i­cal dis­putes in the future. For com­pa­nies, this means above all that they should restruc­ture their sup­ply chains in the long term in order to be able to secure their resource needs even in times of crisis.

Logis­tics cen­ter with low inventory

How do rub­ber pro­cess­ing com­pa­nies con­tin­ue to obtain raw materials?

First­ly, it is advis­able to reduce the com­plex­i­ty of the sup­ply chain in order to mit­i­gate the effect of exter­nal influ­enc­ing fac­tors (puni­tive tar­iffs, sanc­tions, etc.). For exam­ple, deci­sion-mak­ers should rethink their cur­rent just-in-time strate­gies and take the ware­house off the road, at least in part. Keep­ing crit­i­cal com­po­nents such as rub­ber com­pounds or pre­cur­sors in stock can give rub­ber pro­cess­ing com­pa­nies the time to take coun­ter­mea­sures in cri­sis sit­u­a­tions with­out hav­ing to accept pro­duc­tion losses.

It is also advis­able to restruc­ture sup­ply chains, with a stronger focus on Cen­tral and West­ern Euro­pean sup­pli­ers. Local part­ners can react more quick­ly in times of cri­sis, as their trans­port routes are short­er and their goods hard­ly have to cross bor­ders or bot­tle­necks. In addi­tion, there is less risk of trade con­flicts with­in the EU, which could affect sup­ply relationships.

In addi­tion, com­pa­nies should mon­i­tor geopo­lit­i­cal devel­op­ments more close­ly. Con­flicts and crises often take a long time to emerge, giv­ing deci­sion-mak­ers the oppor­tu­ni­ty to react in good time. How­ev­er, this requires pre­cise mon­i­tor­ing of the polit­i­cal sit­u­a­tion in the coun­tries with which the orga­ni­za­tion main­tains trade rela­tions, as well as up-to-date infor­ma­tion on the state of diplo­mat­ic rela­tions and poten­tial caus­es of conflict.

Diver­si­fi­ca­tion of the sup­ply chain is also advis­able, espe­cial­ly in terms of geo­graph­ic dis­tri­b­u­tion. It is worth­while to have sup­pli­ers in dif­fer­ent coun­tries on hand in order to be able to switch to oth­er, non-sanc­tioned trad­ing part­ners in cri­sis sit­u­a­tions. Although this goes against the trend toward sup­pli­er con­sol­i­da­tion in the indus­try, it does cre­ate sta­bil­i­ty. When in doubt, com­pa­nies must weigh both sides against each other.

Con­clu­sion

The war in Ukraine and the sanc­tions against Rus­sia have also hit the rub­ber pro­cess­ing indus­tries hard. Numer­ous sup­ply chains have been cut off and it is unclear if and when the sit­u­a­tion will return to nor­mal. This is exac­er­bat­ing the pan­dem­ic-relat­ed short­age of raw mate­ri­als and putting indus­tri­al com­pa­nies in a tight spot due to ris­ing raw mate­r­i­al prices.

Cur­rent­ly, the weak­ness­es of com­plex, inter­na­tion­al sup­pli­er struc­tures that have long char­ac­ter­ized the man­u­fac­tur­ing indus­tries are becom­ing increas­ing­ly appar­ent. In this con­text, com­pa­nies should care­ful­ly con­sid­er whether the effi­cien­cy ben­e­fits of a just-in-time strat­e­gy are worth the increas­ing risk of sup­ply short­ages and pro­duc­tion down­time. This issue is some­thing that is like­ly to influ­ence glob­al pur­chas­ing strate­gies more fre­quent­ly in the future.

Whitepa­per:
Rub­ber and plas­tics in mod­ern agri­cul­tur­al technology

Learn how agri­cul­tur­al tech­nol­o­gy can meet most of today’s challenges

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Author: Oksana Holovey

Oksana Holovey stud­ied busi­ness admin­is­tra­tion at the Lviv Busi­ness Acad­e­my in Lviv (Ukraine) with a focus on prod­uct man­u­fac­tur­ing tech­nol­o­gy and com­merce. She has been work­ing for Jäger in the export sales field ser­vice for the Hanover loca­tion since 2019.

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