The Impact of the Russian War on Items Necessary for Everyday Living
War and conflict can have strange and unexpected consequences on the global economy and in your family pocketbook at home. Europe in particular has significant risks from Russia stopping gas suppliers, insisting on payment in Russian Rubles, and otherwise impacting the local and global economy in a number of negative ways. Pricing professionals need to think outside the box to maintain good customer relationships, respond to increasing cost pressures, and maintain margins during this time of extreme volatility.
Let’s look at three examples of unexpected disruption as the result of the conflict in Russia and Ukraine. These are specific to this unprecedented time, but the lessons are timeliness in terms of anticipating black swan events that are occurring with increasing regularity.
Let’s consider flat tires, car thieves, and a box of cookies. Sounds crazy, right? These are real issues that multi-nation corporations are experiencing in 2022 and hopefully learning a lesson on how to utilize advanced pricing strategies to survive and thrive into the next year.
Carbon Black Makes Your Relationship Go Flat
Carbon Black is used in batteries, wires and cables, toner and printing inks, rubber goods, and especially in automotive tires. It improves the strength, performance, and ultimately the durability and safety of tires. About 30% of European carbon black comes from Russia and Belarus or Ukraine. These sources are largely off limits, India is sold out, and the cost of sourcing from China is double that of Russia given the transportation cost increase.
Consider the concept of supply certainty and the overall value to a large European tire manufacturer. Pricing professionals should review their supply chain and contracts to understand their risk exposure to supply disruption, the value of supply certainty, and how much they would be willing to pay for this value attribute in terms of the overall pricing and commercial relationship with suppliers.
Find out about how to manage price fluctuations and supply chain challenges:
Platinum, Rhodium, and Palladium Set Off Your Car Alarm
These three commodities are utilized in a large variety of industrial applications but are critical to the automotive industry. All three metals are utilized to manufacture catalytic converters, which help to reduce the toxic emissions created by gas-powered automobiles. About 40% of the world’s palladium
comes from Russia. As sanctions and boycotts have expanded, prices have risen to all time highs, touching $3.500/oz.
Consider the concept of grey market pricing, where products are purchased or otherwise “procured” in one country or region and sold in another. This practice allows companies to utilize a kind of arbitrage on cost and price that negatively impacts the manufacturer. Anyone who lives in a large city will know that the scrap value or resell value of a catalytic converter has increased such that individual cars, trucks, and busses are now targeted by organized crime organizations. Pricing professionals should review their ability to detect and address grey market pricing that occurs because of large differences between regional pricing which is further amplified by commodity shortages and price spikes. Also important is to look at price ladders to maintain proper relationships between new and remanufactured or other similar product hierarchies. These relationships, if not managed in lock-step, can create margin compression where relationships are not well maintained.
Natural Gas Just Ate Your New Box of Cookies
Fertilizer is commonly made from materials including potash, and ammonia. The ammonia in fertilizer is most commonly made by combining nitrogen in the air and hydrogen from natural gas. 40% of the natural gas in Europe comes from Russia and 25% nitrogen, potash, and phosphates. 48% of global ammonium nitrate comes from Russia. Countries like France are particularly hard hit as 70% of their fertilizer needs have historically been sourced from Russia.
To make matters worse, China has limited exports, including fertilizer, in favor of addressing domestic demand.
Farmers are considering rotating to crops that require less fertilizer, however, grain shortages are driving up the cost of basic foods. In addition, Russia and Ukraine together make up about one-quarter of global wheat production. Ukraine is a major producer of sunflower seed oil, and cereals, and is the 5th largest global grain producer. The combined impact of fertilizer products and grain and seed oil production is significant to the global economy.
So, what are you to do especially if you’re in the chemical industry? Check out this article where we outline planning your pricing strategy even in unforeseen events: The Most Important Chemical Industry Issues & Pricing Strategies for 2022