The war in Ukraine has been a catastrophe for all concerned.
More than 500 Ukrainian civilians have been killed by Russian troops while millions have been forced to flee into neighbouring Poland, Hungary, Slovakia, and Moldova.
But the effects of the conflict will continue to ripple reverberate around the globe for years to come and not just for the people of Ukraine.
According to supply chain analysts Achilles, the war will, and has already begun to, have far-reaching effects on the way ordinary people from Shanghai to San Francisco and from Kyiv to Kensington live, work, and travel. Everything from the supply of lithium to semiconductors has been impacted – and these shortages will have serious consequences.
Auto Futures has been talking to Katie Tamblin, Chief Product Officer at research group Achilles, to better understand the situation we’re in.
“You’re Not Worried Enough”
“The war is having a pretty significant impact,” says Tamblin.
“I think what’s interesting is the state that supply chains were already in. If they had been extremely robust, and we hadn’t just lived through a couple of years of a global pandemic that had already stretched supply chains thin, I think we would have a typical commodity price spike.”
The coronavirus pandemic severed supply chains across the world as production in factories slowed and transit between countries was prevented. The war in Ukraine, meanwhile, has made moving goods between Asia and Europe challenging and prohibitively expensive.
“I was talking to a customer who said they used to move items from China to Europe via rail,” says Tamblin.
“They can’t do that right now, so they’re having to do it via ship. That’s 30% to 40% more expensive than coming by rail and it has a much longer lead team.”
“But I think what makes this such a terribly impactful crisis right now for supply chains, in particular, is that those chains were already very fragile off the back of the COVID pandemic. We already had really high commodity prices, we already had shortages for things such as semiconductors and lithium, pulp, and wood – they were just starting to recover. As you layer all of those things on top of each other we have a very worrying situation on our hands.”
Of course, this is all fairly obvious. What is more concerning, however, is the numbers that Tamblin and Achilles have been able to put on the situation.
Commodity prices rose by a “further” 12% in Q4 2021 and Achilles expects increased volatility thanks to the war. In fact, prices had increased by more than three-quarters in Q4 compared to the previous year. The Russian war machine is having a particular impact on oil, gas, nickel, and aluminium supplies.
Lithium meanwhile, which is essential for the batteries in many electric cars, is expected to “continue increasing throughout the year, with no end in sight to the global shipping delays and supply tightness.”
“It takes five to seven years for a lithium mine to come online and, if you look at the lineup of supply and demand, there is not enough supply over the next five to seven years to equal the demand,” explains Tamblin.
“I was already slightly concerned about it,” she continues, “and then I had coffee with a contact and old colleague of mine who has done a lot of research quantifying the supply and demand of lithium. He said ‘How worried are you about lithium?’ I said that I was worried. He said ‘You’re not worried enough,’ based on the numbers he’s run.”
Forcing the Switch to EVs
However, with the price of both oil and lithium expected to continue rising, drivers are likely to be left between a rock and a hard place.
“We have cross-currents,” explains Tamblin, “and it’s always difficult to predict which current is going to win out because the hardest thing is to predict the magnitude. It will become a game – which puts more pressure on the consumer: petrol prices or the shortage of lithium?”
The rising price of petrol and a corresponding increase in the price of lithium, which will surely be passed down to consumers, coupled with the expansion of low emission zones in the UK and looming bans on new petrol and diesel cars around Europe leaves drivers with a tough decision to make.
“It [the price of petrol] is a very immediate pain that I think will cause consumers to shift to electric vehicles faster,” says Tamblin.
“If you think about the timeline over which the electric vehicle shortage will happen, it’s slightly more long term. So, if I was already thinking about buying a new car, and the petrol price has just gone through the roof, I would be more likely to buy an electric car.”
However, that situation is far from certain.
“I would be surprised if there’s not short-term switching and short-term bumping up of electric vehicle demand,” says Tamblin.
“It’ll be interesting to see how it plays out in the future if the price of oil comes down. If that happens, while lithium prices continue to make electric vehicles short of supply, then you might see people switching back.”
As with any economic crisis, however, there are questions around the role that governments have played in causing it and how they can fix it for the, largely powerless, consumers caught up in a swirling sea of price rises.
“As an economist, my background would say the government should really only intervene when there are what we call externalities,” says Tamblin.
“Where the political debate comes in is when you ask ‘What are those externalities and how do you quantify them?’ I don’t know that there is a government that can solve this crisis. It’s too global. It’s too widespread. It relies on supply chains that cross too many borders for any one government to achieve something.”
“I think what governments can do is to subsidise renewable energy sources that are currently high cost because there is an external benefit to moving to renewable energy – the impact on the environment.”
“The flip side is what we already have in place, which would be duties and taxes on items that have a negative external impact, such as fossil fuels.”
“Naturally, consumers are going to be hurt punitively by that. There is a cold-hearted, non-humanitarian argument that says the best way to change behaviour is to make it unaffordable. It’s a very mathematical but hard line to take when people are significantly impacted by not being able to get to work or heat their homes – you can’t have economic losers when there is a social impact.”
“There are lots of vested interests moving in different directions. Governments will have to consider how they manage across borders, how they cooperate, how they manage consumer choice.”
Securing the Supply
For automakers, the strained supply chains will have a number of major impacts – not least their ability to actually make cars.
“Secure as much supply as you can,” advises Tamblin.
“We’ve already seen some major automakers going vertical in the supply chain for lithium – I think that was a very savvy move. In lieu of doing that, secure extremely strong partnerships with suppliers.
“Be prepared to pay what you need to pay to get the stocks directly. When suppliers get to choose who they sell to, price is obviously the first factor but, when the price is common, they go for the companies where they see the longest-term relationship.”
Almost 20 million electric cars are going to be taken out of production due to the lithium shortage and the impact of the war in Ukraine, according to the Centre for Automotive Research – which is sure to have a huge effect on the consumers and economies of Europe.
Sadly, from talking to Tamblin, it seems as though the shortages will make everything, for everyone, harder before getting easier.
