Sponsored content - Supply chains at 'critical tipping point'

posted by Sponsored by Achilles
13 April 2022

This content was produced in partnership with Achilles

The war in Ukraine has piled pressure onto already strained supply chains to create a period of unprecedented disruption.

Rising commodity prices have combined with shortages and bottlenecks to push supply chain risk to record highs – and procurement professionals are being warned the outlook is “extremely concerning”.

The Achilles Supply Chain Resilience Index (ASCRI) dropped to 44.9 in the fourth quarter of 2021, down from 45.4 in quarter three and only narrowly above the score of 40 that denotes “very high” risk. The index runs from one to 100, with one denoting very low resilience and high risk and 100 indicating high resilience and low risk.

The ASCRI dropped throughout 2021 and Achilles expects the 40 threshold to be breached in quarter one of 2022. 

Katie Tamblin, chief product officer at Achilles Information, said: “We are living through an unprecedented period of pressure on global supply chains. Russia’s invasion of Ukraine, the Covid hangover, disrupted shipping routes, port congestion, and seemingly ever-rising prices are causing substantial concerns for supply chain leaders across the globe. 

“Increased concerns about the health and resilience of supply chains and the global economy dominate the majority of supply chain conversations today.”

10% of global wheat exports at risk

The ASCRI said Ukraine is the fourth largest provider of cereals and vegetables in the EU, exporting corn, wheat (20m tonnes per year or 10% of global exports), and sunflower oil. Disruption to this supply could fuel additional food price inflation – on the day of the Russian invasion wheat prices in the UK rose by £16 per tonne.

The invasion is also driving price volatility for oil, gas, nickel and aluminium.

Achilles said if the Russia-Ukraine war is short-lived or contained, commodity prices could ease slightly throughout 2022, although spikes in individual prices will continue to ripple through semi-finished and finished goods. It said it typically took 6-12 months for full price effects to flow through to consumer inflation, “which means there is more room for consumer prices to rise”.

“The scale, longevity and impact of conflict will dictate which commodities and on what timeline we could see a relaxation in price pressures for key energy and metal inputs,” said the ASCRI.

Price rises yet to run their course

The ASCRI said commodity prices rose 12% in quarter four of 2021, up 77% year-on-year, and they continued to rise in January and February of 2022, “signalling that while price rises might be easing, price increases have yet to fully run their course”.

Indeed, spikes in input costs during 2021 filtered through to consumer inflation, which hit 30-year highs in the UK and US in December.

The ASCRI’s fall during 2021 was driven mainly by energy prices, though metal prices increasingly played a part in the second half of the year.

Tin prices peaked at $39,159 a tonne in November 2021, up 79% on the start of the year, driven by shortages caused by increased demand from the electronics sector, where it’s used to make circuit boards.

Meanwhile molybdenum, mostly mined as a by-product of other metals, more than doubled in price from under $20 per kg in July 2020 to around $45 in October 2021. Used as an alloy in steel, China’s push on infrastructure has driven up the price of molybdenum, but it is also used in energy creation, defence products, and in electric vehicles.

Trade-off between cleaner cars and green electricity

Lithium prices have been boosted by the shift to renewables and electric vehicle production. By 2030 excess demand for lithium is expected to reach between 500,000 and 1.5m tonnes per year, creating the perfect conditions for supply disruptions and price spikes.

Battery shortages could take 4.4m cars out of production in 2026, while the semiconductor shortage could cut car production by up to 10m during 2021-23. The number of electric vehicles taken out of production between 2022-29 due to shortages could be double that.

This will have implications for the transition to green energy as two key industries – electric vehicle production and renewable energy storage – compete for lithium, “suggesting that we may get cleaner cars or cleaner electricity production, but getting both concurrently will be difficult”.

Identifying vulnerabilities

Tamblin said it was crucial for procurement professionals to use data to inform purchasing decisions, while supply chain visibility was critical to identify vulnerabilities and alternative suppliers.

“Supply chain data emerging from quarter four of 2021 was already indicating that 2022 would be a rocky road for global supply chains, and now with the additional conflict in Ukraine, the outlook is extremely concerning,” she said.

“The Achilles Supply Chain Resilience Index has, throughout the whole of 2021, flagged commodity prices and energy supply as bellwethers for global supply chains. Pummelled by so many challenges over the last two years, supply chains have not had time to recover, and we now face a critical tipping point that could have both supply and cost ramifications rippling through industrial and consumer markets for years to come. 

“Now is the time to practise the lessons of the pandemic, and as we emerge into a new world order, use data to inform purchasing decisions. Our data shows that to weather this crisis, organisations need visibility across their supply chains to identify vulnerabilities and alternative sources of supply.”

The ASCRI measures underlying supply chain resilience across six categories: economic, environmental, labour practices, legal and governance, resilience, and safety and security, supplemented by a range of measures including shipping and sentiment data.

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