Ukraine's Impact on Manufacturers Is Foggy

"Manufacturers' supply-chain problems looked as if they were set to start easing this year. Russia's operation to protect Donbas could throw a wrench into that process, but good luck figuring out what the outcome will be.

The Institute for Supply Management on Tuesday said its index of U.S. manufacturing activity rose to 58.6 in February from 57.6 a month earlier, while a similar index from IHS Markit rose to 57.3 from 55.5. For both indexes, anything over 50 indicates expansion.

Factories would probably be running even harder if they were able to get the raw materials and parts they need. Supply-chain issues continue to hamper production, but there were signs of light. IHS Markit reported delays in deliveries were the least severe since last May. And the ISM and the IHS Markit surveys indicated that the prices manufacturers were paying rose at a slower pace in February than the previous month.

With the sharp drops in Covid-19 cases across much of the world, as well as shifts in many governments' approach to fighting the disease, factories would likely have had an easier time getting supplied this spring -- if it weren't for Russia. The invasion threatens to curtail supplies of steel and commodities used in semiconductors. The rise in oil prices will increase transport and production costs, while the conflict has begun to disrupt shipping.

There are offsets to consider: Russia is an exporter of commodities, but it is an importer of capital goods, manufacturing components, consumer goods and transportation equipment. The sanctions and the sharp decline in the value of the ruble mean that it will be able to buy significantly less from abroad, potentially easing supply strains elsewhere.

For example, there were 1.7 million new cars and other light vehicles sold in Russia last year, according to the AEB Automobile Manufacturers Committee. Presumably, fewer will be sold this year and components that went into them will be directed elsewhere. Daimler Truck Holding said Monday that it would suspend deliveries of truck components to its Russian partner Kamaz, which accounts for over one-third of the Russian truck market.

Russia's economy is about the size of Australia's, and its financial isolation and dependence on oil production mean that it isn't as integrated in supply chains as many other countries. Ukraine's economy is more globalized, but smaller.

It is impossible to figure out how global supply chains will interact with the uncertainty of war -- especially during a pandemic. Don't bet on factories having a harder time getting what they need just yet. The longer the conflict and sanctions drag on, the more manufacturers will feel its bite." [1]

1. Ukraine's Impact on Manufacturers Is Foggy
Lahart, Justin. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 02 Mar 2022: B.12.