The RSM UK supply chain index has rebounded over the last few months suggesting that events in Ukraine have not started to materially impact UK supply chains yet. However, the war in Ukraine and coronavirus-related lockdowns in China mean supply chains are likely to come under renewed stress over the rest of this year, before they have even recovered from the pandemic.
Data released on Monday by the ONS show supply chains were under severe strain in Q4, with stocks in the motor vehicle industry 10% lower than their pre-pandemic level. That chimes with the RSM UK Supply Chain Index (SCI), which dropped to its joint third-lowest level in December. The index rose 30% in February, however, to 2.5 standard deviations below long-term normal conditions. It’s a sign that, while conditions are improving, supply chains are still under a significant amount of stress.
Indeed, the new RSM UK Middle Market Business Index (MMBI) told a similar story for Q1. The MMBI survey found evidence that the shortages of materials and associated price rises that affected firms over the past year were easing. The number of firms expecting input prices to rise over the next six months dropped from 69% in the last quarter of 2021 to 64% in Q1 of 2022. What’s more, the number of firms planning to raise their own prices over the next six months fell from 72% to 63%. This suggests that, if price pressures further down the production chain start to relax, middle market firms will try to avoid uncompetitive price increases.
Unfortunately, Russian sanctions and further port closures in China mean that these improvements will likely reverse later in the year.
The best example of how the crisis might spark another supply chain crunch is in the palladium market, where Russia’s share of global production is just over 45%. Palladium is a component of the advanced microchips used in vehicle production, so this will impact manufacturing firms (especially in the motor vehicle sector). But all middle market businesses should be prepared to scour their downstream supply chains for areas that may be vulnerable to supply disruptions from Russia.
There is some comfort to be had from the fact that local manufacturers and multinational businesses are better prepared than they were before the pandemic to address such disruptions. What’s more, the shift in consumer spending from goods back towards services will blunt the impact of any shutdowns abroad. Although China has so far managed to avoid the widespread shutdowns of factories and ports, which crippled global supply chains during the pandemic, it seems inevitable that there will be some disruption, especially to the supply of construction and manufacturing materials.
Middle market firms face an increasingly challenging outlook. The Russian invasion of Ukraine has dramatically increased the scarcity and prices of a broad range of commodities, from oil to wheat, and that’s driving up costs. Restrictions on exports from Russia and coronavirus-related shutdowns in China risk sparking another supply chain crisis before the economy has recovered from the last one.
As a result, instead of marking a return to normality after the challenges of the pandemic, 2022 is likely to be another extremely challenging year for the middle market.