March 17th, 2022
Supply Chain Nightmares
Just when you thought the supply chain nightmare was starting to let up, a war breaks out in Ukraine. With the recent economic sanctions being put into place against Russia, how will this war exacerbate the global supply chain headaches that emerged last year, and is this a temporary crisis or one that will have a lasting impact on how we do business? It really is enough to keep one up at night!
A recent article by Tinglong Dai, a professor at Johns Hopkins University, sheds some light on how our global supply chain may be permanently altered by this war and a consequent re-emergence of the “Iron Curtain.” However, things could change if the recent sanctions cause a change in Moscow’s direction. One thing is for certain, 2022 is shaping up to be even more of a challenge than 2021, and who thought that could be possible? Here are three major impacts we will see from this war in 2022 and beyond.
Rising Cost of Energy and Oil-Related Components: The cost of energy will rise. Russia provides nearly 40% of Europe’s natural gas supply and 65% of Germany’s. Russia is the third-largest oil exporter in the world, accounting for 7% of all crude oil and petroleum product imports into the United States. So, when the U.S. recently announced a ban on Russian oil imports, the price of crude hit a 13- year high topping $130 per barrel.
The Keystone XL pipeline was expected to carry 830,000 barrels per day of Alberta oil sands crude to Nebraska, but the project was delayed for the past 12 years due to opposition from U.S. landowners, Native American tribes and environmentalists. Last June, President Biden canceled the border-crossing permit for the pipeline effectively killing the project. This made the environmentalists happy but certainly does not help the current situation as it relates to energy independence.
The bottom line here is that everything that comes from oil will be going up in cost, and there are many things that go into a window and door that are either made from oil derivatives or use a fair amount of energy to produce. As of March 15, oil prices are falling again and are now down to $96 per barrel. But this is still $28 higher per barrel than the average price in 2021. So far, the average price in 2022 is $91.91. Here is the recent price history.
More Strain on Electronics Supply: A lesser-known fact is that 90% of the semiconductor-grade neon used in the United States is produced in Ukraine, and Russia was supplying the U.S. with more than one-third of our country’s palladium, a rare metal also required to make semiconductors.
Semiconductor producers do have enough inventory to fulfill immediate needs but are now scrambling to find alternative suppliers. Disruptions in supply and higher costs to produce electronic components will surely follow. All of this is hitting as the world tries to recover from a severe chip shortage, which has slowed auto production, and sent new and used car prices through the roof. This factor will drive up the costs and increase the lead times of automated machinery used to make windows and doors. One of my customers is finally receiving a new welder this month that was ordered 16 months ago. “When I got the call that the new welder was expected to ship this month, I had forgotten that I ordered it,” he half-jokingly commented.
Impact on Logistics: The third major impact we will see is more delays in moving raw materials and components from the East to the West. Soon after Russia launched their attack on Ukraine, 36 countries, including EU members, the U.S., and Canada, closed their airspace to Russian aircraft. Russia retaliated by closing its airspace to these same countries. As a result, goods transported by air freight from China to Europe or the Eastern U.S. will, in many cases, need to go via less efficient or more costly routes. The result will be increased transportation costs and longer lead times.
The China-Europe rail freight route that goes through Russia was really starting to help alleviate the congestion we saw in 2021 at major ports. However, due to the war, we are seeing many cancellations along this railway from European clients, which will once again increase the congestion at the ports. In addition, rising gasoline and diesel costs will drive up transportation and delivery costs in the trucking industry. We are already seeing the effects of this on shipping quotes.
So, what can window fabricators do to overcome these recent challenges? The simple answer is for the window industry to keep doing what we did to survive 2021. Stay close to your suppliers, keep the lines of communication open, give and seek adequate notice of cost increases and delays, forecast product usage, improve manufacturing efficiencies, develop contingency plans for every raw material and component, and last but not least—treat your employees as great as you can.