Listen to this article
Reading time: 5 minutes
The war in Ukraine was a disaster for everyone.
More than 500 Ukrainian civilians have been killed by Russian troops while millions have been forced to flee to neighboring Poland, Hungary, Slovakia and Moldova.
But the effects of the conflict will continue to be felt around the world for years to come, and not just for the Ukrainian people.
According to supply chain analysts Achilles, the war will have, and has already begun, far-reaching effects on how ordinary people from Shanghai to San Francisco and from kyiv to Kensington live, work and travel. Everything from lithium supply to semiconductors has been hit – and these shortages will have serious consequences.
Auto Futures spoke with Katie Tamblin, Product Manager of Achilles Research Group, to better understand the situation we find ourselves in.
“You’re Not Worried Enough”
“War has a pretty big impact,” says Tamblin.
“I think what’s interesting is the state the supply chains were already in. If they had been extremely robust, and we hadn’t just been through a few years of a global pandemic that had already stretched supply chains, I think we would have had a typical spike in commodity prices.
The coronavirus pandemic has severed supply chains across the world as production at factories has slowed and transit between countries has been impeded. The war in Ukraine, meanwhile, has made transporting goods between Asia and Europe difficult and prohibitively expensive.
“I was talking to a customer who told me he used to transport items from China to Europe by rail,” says Tamblin.
“They can’t do it right now, so they have to do it by boat. It’s 30-40% more expensive than coming by train and the management team is much longer.
“But I think what makes this crisis so terribly impactful right now for supply chains, in particular, is that those chains were already very fragile as a result of the COVID pandemic. We already had very high commodity prices, we already had shortages for things like semiconductors and lithium, pulp and wood – they were just starting to pick up. As you layer all of these things, we have a very disturbing situation on our hands.
Of course, this is all pretty obvious. What’s more concerning, however, are the numbers Tamblin and Achille were able to put on the situation.
Commodity prices rose “again” by 12% in the fourth quarter of 2021 and Achille expects increased volatility thanks to the war. Indeed, prices had increased by more than three quarters in the fourth quarter compared to the previous year. The Russian war machine has a particular impact on oil, gas, nickel and aluminum supplies.
Lithium, meanwhile, which is essential for the batteries of many electric cars, is expected to “continue to rise throughout the year, with no end in view of global shipping delays and supply shortages.” .
“It takes five to seven years for a lithium mine to come online and if you look at supply and demand, there’s not enough supply over the next five to seven years to match demand,” says Tamblin.
“I was already a little worried about it, she continues, then I had coffee with a contact and a former colleague of mine who did a lot of research to quantify the supply and demand of lithium. He said ‘How worried are you about lithium?’ I said I was worried. He said “You’re not worried enough”, based on the numbers he ran.
Force the switch to electric vehicles
However, with the price of oil and lithium expected to continue to rise, drivers risk being left between a rock and a hard place.
“We have cross currents,” says Tamblin, “and it’s always difficult to predict which current will win because the hardest part is predicting the amplitude. It will become a game – which puts more pressure on the consumer: the price of gasoline or the shortage of lithium?
The rise in the price of petrol and a corresponding increase in the price of lithium, which will surely be passed on to consumers, coupled with the expansion of low emission zones in the UK and the impending ban on new petrol cars and diesel across Europe, leave drivers with a difficult decision to make.
“This [the price of petrol] is a very immediate pain that I think will make consumers switch to electric vehicles more quickly,” says Tamblin.
“If you think about the timeline over which the shortage of electric vehicles will occur, it’s a bit more long-term. So if I was already thinking of buying a new car and the price of gas had just skyrocketed , I would be more likely to buy an electric car.
However, this situation is far from certain.
“I would be surprised if there was no short-term change and short-term increase in demand for electric vehicles,” says Tamblin.
“It will be interesting to see how it goes in the future. if the price of oil goes down. If that happens, as lithium prices continue to squeeze the supply of electric vehicles, you might see people backtracking.
As with any economic crisis, however, there are questions about what role governments have played in its cause and how they can remedy it for largely helpless consumers caught in a swirling sea of price hikes.
“As an economist, I would say government should only really intervene when there are what we call externalities,” says Tamblin.
“Where the political debate comes into play is when you ask ‘What are these externalities and how do you quantify them?’ I don’t know if there is a government capable of solving this crisis. It’s too global. It’s too common. It relies on supply chains that cross too many borders for a single government to achieve.
“I think what governments can do is subsidize renewable energy sources which are currently expensive because there is an external benefit to switching to renewables – the environmental impact.”
“The other side of the coin is what we already have in place, which is duties and taxes on things that have a negative external impact, such as fossil fuels.”
“Naturally, consumers are going to be punished in a punitive way by this. There’s a cold, unhumanitarian argument that says the best way to change behavior is to make it unaffordable. It’s a very mathematical but hard line to follow 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’s a social impact.
“There are a lot of vested interests that are moving in different directions. Governments will have to look at how they manage across borders, how they cooperate, how they manage consumer choice.
For automakers, strained supply chains will have a number of major impacts, including their ability to manufacture cars.
“Get as much supply as possible,” Tamblin advises.
“We’ve already seen some major automakers go vertical into the lithium supply chain – I think it was a very smart move. Instead, build extremely strong supplier partnerships.
“Be prepared to pay what you have to pay to get the shares straight. When vendors choose who they sell to, price is obviously the first factor but, when price is common, they go for the companies they see the longer term relationship.
Nearly 20 million electric cars are set to be withdrawn from production due to lithium shortages and the impact of war in Ukraine, according to the Automotive Research Center – which is sure to have a huge effect on European consumers and economies.
Unfortunately, after talking to Tamblin, it looks like the shortages will make everything, for everyone, harder before it gets easier.