Scale and resilience: the realignment of the global supply chain

We are at a critical moment of transition. We have been warning of a dramatic realignment of the global supply chain since the pandemic dramatically forced companies to rethink their manufacturing footprint, just-in-time inventory practices and global supply chain structures.  

Now, Russia’s invasion of Ukraine will significantly accelerate this realignment.  It has significantly impacted the supply of commodities like oil and gas, grains, fertilizers and non-ferrous metals. Some of these commodities continue to be supplied and if and when the conflict is settled as we fervently hope, some of these constraints will improve.  While the conflict is ongoing, the impact will clearly lead to shortages of those commodities and will be inflationary in the short-term. 

Our investment horizon, however, is long-term.  Against the background of an otherwise robust global economy, recovery from the pandemic, strong growth in demand for goods and services, and an enormous need for investment in the public and private capital base and infrastructure, the global supply and demand for commodities, goods and services will only grow.  What will change are the flows.  This is the realignment we see. 

The global economy has weathered many crises, as have the global companies we invest in.  While there are great challenges ahead, we think that the conflict is a call on the global powers to step up and face their responsibility to further peace and prosperity in our interdependent and multipolar world, and that the realignment should ultimately make the global economy more, not less, robust.

As we wrote last year, fundamental principles of the global economy have been increasingly put into question, including the globalisation of supply chains and the maintenance of just-in-time inventory levels.  Even before the pandemic, key parts of the global supply chain were tested by trade disputes between China and the US.  The pandemic itself exposed the risks of extended supply chains and has made agility, resilience, localisation and diversification of supply chains an increasing area of focus for global companies.

The Russia/Ukraine conflict and the sanctions imposed by the United States and Europe will not only aggravate existing issues but broaden pressure to global commodities.  One of the biggest issues is Russia’s status as one of the largest global suppliers of oil and gas, in particular because of Europe’s dependence on Russian pipeline gas.  Russian and Ukrainian grain is critical to global food supplies.  Russia is also one of the world’s largest producers of a number of key specific commodities with mission-critical functions in components for catalytic convertors or for lasers for semiconductor chips.  Closure of airspace means flights are rerouting adding travel time and increased usage of fuel, at a time when the price of oil is at record highs.  Alternative ways of transport take longer and will increase pressure on ports already affected by pandemic-related blockages over the past two years.

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