The world today is facing an acute energy crisis, due to various reasons like increasing demand owing to high population growth, the climate factor (for e.g., closing of coal mines due to heavy rain or environmental concerns), etc. However, the Russia-Ukraine war, which started on February 24, 2022, is feared to end many businesses and lead to a global supply chain disaster for an already struggling system.

Metals & chemicals

In the past, Russian mining companies had not experienced significant logistics disruption while exporting metals to Europe. However, logistical bottlenecks are now increasing under war-induced-embargo situation, pushing up export costs and extending delivery times. A high concentration of industrial metal supply relies on Russia especially in case of nickel, palladium, platinum, rhodium, aluminium and copper. Aluminium is facing the most significant and immediate disruption risk as around 60 per cent of Russia’s traditional alumina import requirements are closed off or disrupted. This is also because Australia, accounting for 20-30 per cent of Russia’s import requirements, has recently banned the export of Australian alumina ores and related products to Russia. Operations from Ukraine – the largest exporter of alumina to Russia, also stand suspended since March 22. This makes alumina shortage a tangible issue which is emerging problematic for supply chains as aluminium, being a critical metal, is used in packaging, transport (automobiles and aerospace), renewable energy infrastructure and wiring. The low availability of aluminium within Europe is also making it impossible to create enough solar panels as an energy alternative in the wake of Russian gas cut-off. Even the industries outside Europe utilising steel or metals from the region are facing serious issues. Another notable factor is that Russia is a very significant producer and exporter of potash, with around 18 per cent of global potash production in 2021. Another 17 per cent of global production in 2021 came from Belarus where the major producer has also admitted facing reduced capabilities. Russia also accounts for roughly 10 per cent of global ammonia production, 20-25 per cent of global ammonia exports and 5 per cent of global urea production.

Agro-supply chain

Many farmers across Europe grow crops in greenhouses which require additional heating. The energy crisis for this segment means shortage of many crops such as cucumbers, tomatoes, sugar beets and olives, which will shrink their global supplies in the coming months. High energy costs are impacting not only farmers, many of whom have decided against planting anything in the first place, but also other services around the food industry such as bakery and dairy farming. In such a situation, even the curbs on energy costs put on by certain governments are not helping the supply chain issue. The share of agriculture sector in total exports is expected to see a change with unsteady prices as the future of agro-sector within the EU and outside will largely depend on Russia-Ukraine war’s fate.

The agriculture and related food industries use direct energy such as electricity for automated water irrigation; fuel consumption for farm machinery; and energy required at various stages of food processing, packaging, transportation and distribution. In addition, use of pesticides and mineral fertilisers consume large quantities of indirect energy. Depending on the type of region and crop, the direct and indirect energy costs average 40-50 per cent of total variable costs of cropping in US and Europe. Therefore, war-induced surge in energy prices is expected to prove detrimental for the sector.

Prices of fertilisers

Fertilisers’ costs are also soaring up increasing overall input costs. Why? Because nitrogen is essential nutrient for all plant life and ammonia is the starting point for all mineral nitrogen fertilisers. Half of ammonia is converted into urea which is the most common nitrogen fertiliser product globally. Throughout the world, ammonia is made almost exclusively from natural gas consuming about 170 billion cubic metres. Only China is the exception where ammonia production is mainly coal-based. Since natural gas often accounts for 70-80 per cent of the operating costs of producing ammonia and urea, it caused fertiliser prices to more than triple since mid-2020 to reach their highest level since 2008-09 crisis and record highest level in the case of urea.

The gas prices have been on a constant rise since early 2021 across all key gas-consuming regions. As a fallout of Ukraine war, the European and Asian benchmark prices hit all-time records during Q1, 2022. The spiralling costs of natural gas caused some nitrogen fertiliser plants to announce temporary closure during H1, 2022. Though the surge in fertilisers’ prices have also been partly due to demand recovery and trade restrictions, the continuation of war is feared to scarce supply of fertilisers impacting import-dependent markets. Top five ammonia producers in the world – China, the EU, the US, India and Russia, together account for around two-third of global production. While Russia has the highest share of production provisioned for exports at around one-fifth, the self-sufficient China is the largest producer globally. The EU, the US and India are all significant net importers too. In case of urea, some major consuming regions depend heavily on imports – India imports around 30 per cent and Brazil close to 100 per cent of their aggregate urea requirement. Many African nations also import very high shares of their urea consumption. In the situation of short supplies and price rises, such import-dependent regions must be ready to face severe effects. If forced to use less fertilisers as an option, crop yields for the next harvest will be impacted negatively further compounding food crisis. The high food prices will also hamper domestic production. According to UN’s Global Crisis Response Group, the distortion of food and fertiliser markets is already affecting wheat and vegetable oil crops. If fertiliser shortage and high prices continue into subsequent planting seasons, the world’s most consumed staple – rice, will be the next crop to face pressure, affecting billions of people in Asia and the Americas.

Endangered food security

Food prices, already on rise over the last two years, have risen even faster amidst Ukraine war. While current challenges in food supply chains are caused by a multitude of factors, the link with global energy crisis is a significant one. The war-caused disruption has brought out the interwoven nature of the world’s energy and food supply chains into sharp focus. World Forum Programme estimates the number of people facing acute food insecurity to have more than tripled between 2017 and 2022 and can further increase by 17 per cent. The surge in food prices since 2020 has been driven by factors such as the recovery in demand following the COVID-19 crisis, adverse weather impacts on supply, a growing number of trade restrictions on food products, and rapidly soaring input costs, notably energy and fertilisers.

The war has become the biggest factor since both Russia and Ukraine are major food exporters, together accounting for almost 30 per cent of global wheat exports. Both play key role in global supplies of fertilisers too. Russia has blocked the Black Sea ports disrupting food and other commodity exports from Ukraine besides the broader military engagement putting this year’s harvest at risk. The war has driven up energy prices resulting in cascading effect on food supply chains via rising energy bills and soaring fertiliser prices. Since supply chains, and markets for food and associated input such as agrochemicals, fertilisers, fuel, feed, capital and labour are globally interconnected, the seemingly small supply disruption in one region or sector can lead to awful consequences in another.

The auto-parts supplies

The automotive sector is getting affected due to rising costs and the scarce availability of nickel, copper, platinum group metals, aluminium and steel products. Escalating Russia risks, complex automotive supply chains and dependence on key metals has the potential to make the situation volatile in the coming months. J.P. Morgan Research’s global car production assumption has been updated from +4 per cent to -1 per cent for FY22 but from 6 to 7 per cent for the fiscal year 2023. FY23 projection is based on two assumptions – H2, 2022 will reflect the recovery of supply chain in Russia and Ukraine, and expectation of a quick recovery of production in China as the country gains control of COVID-19 pandemic.

Alleviating the crisis

One way of addressing the energy crisis is transition to other resources. Hence, there is a need to develop sufficient manufacturing capacities of critical energy transition materials such as copper, lithium and others. Alongside, stable raw material supply chains and adequate infrastructure needs to be strengthened.