Volkswagen supply chains disrupted by Ukraine war

9 March 2022

Russia’s war in Ukraine is halting the production of vital automotive parts, with Volkswagen and Skoda being forced to limit production. 

The European Association of Automotive Suppliers (CLEPA) said the war had affected “significant parts” of automotive supply chains, including supplies of nickel, iron, neon gas for microchips, palladium for catalytic converters, and nickel for lithium-ion batteries.

Prices of nickel doubled to record levels this week, reaching over $100,000 a tonne.

Just under a third (29%) of steel imported into the EU comes from Ukraine. The country is also one of the largest suppliers of noble gases used in the production of semiconductors, particularly the neon used in lasers that etch features onto chips. Ukraine is responsible for 25% of global neon supplies.  

Sigrid de Vries, secretary general at CLEPA, warned: “I think it’s safe to say that the war in Ukraine has dramatically shifted the risks facing global supply chains, with all of the geopolitical and economic uncertainties it comes with.

“European suppliers were already facing many challenges, and the crisis will only intensify the situation for the industry.

“If the conflict is not resolved in the near future, we can expect the chip shortage to only get worse. Supply of critical raw materials will be impacted as well.”

More than 30 European automotive suppliers have facilities in Ukraine. Imports of auto parts into the EU from Russia totaled €113m in 2021.

Volkeswagen confirmed it was experiencing supply difficulties as a result of the conflict. A spokesperson said: “The supply chain may be adversely affected due to the current situation in this region. That may result in adaptations to production at individual locations of the group. 

“We will have to proceed cautiously in the coming days and weeks and constantly reassess the situation. The supply chains of a number of German and also European plants have already been affected.”

Volkeswagan said it obtains wiring harnesses for vehicles’ electrical systems from Ukraine, and numerous switches for its interior from Ukrainian suppliers.

Skoda additionally announced it was limiting production of some of its vehicles due to limited supplies from Ukraine. 

SMMT chief executive Mike Hawes told The Guardian: “Russia and Ukraine produce some key raw materials for the European automotive supply chain, including aluminium, palladium and nickel, which is used in battery manufacturing.

“Rising metal costs add further risk into global supply chains already impacted by inflationary pressures, component shortages and energy price rises. UK vehicle makers are highly adaptable, but commodity prices are often set on international markets and volatility is expected for some time.”

Meanwhile the UK will phase out imports of Russian oil by the end of the year, business secretary Kwasi Kwarteng confirmed.

The UK and US have now said they are banning oil from the country.

The UK’s plans will also establish a taskforce to support businesses find alternative supplies.

The government said it is working closely with the US, the EU and other partners to end the UK’s dependence on Russian hydrocarbons.

Kwarteng defended the government’s decision to phase out the use of oil, saying: “We have more than enough time for the market and our supply chains to adjust to these essential changes. Businesses should use this year to ensure a smooth transition so that consumers will not be affected.”

Russian imports account for 8% of total UK oil demand. Around 18% of this is diesel, and 5% is jet fuel.

Shell announced it will cease using Russian oil following a backlash against the company’s decision to purchase 100,000 tonnes of Russian crude oil.

The company said it will immediately stop purchasing the oil, and said it will halt its aviation fuel operations in the country.

Ben van Beurden, CEO of Shell, said: “We are acutely aware that our decision last week to purchase a cargo of Russian crude oil... was not the right one and we are sorry.”

Shell bought the oil at a discounted rate of $28.50 a barrel. Global Brent crude oil hit record highs of $139 a barrel this week. 

The company bought the oil from one of the biggest commodity traders and largest exporters of Russian oil, Trafigura Group Pte. Ltd. Trafigura had failed to sell the oil, before receiving a bid from Shell after massively dropping the price. 

Almost 70% of Russia’s oil is currently struggling to find a buyer.

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