European supply shock: sectors and countries most at risk

Although some supply chain tensions have eased recently, risks are rising again. Some sectors and countries are more vulnerable due to material and labor shortages and soaring prices. The Russian-Ukrainian war will further exacerbate supply chain issues affecting commodity prices as well as energy-dependent and related industries.

• The EU is already facing record shortages of materials and labor and soaring producer prices.
• According to our index of vulnerability to supply-side constraints, Hungary, Denmark, Finland, Ireland and Germany are the countries most vulnerable to supply-side constraints. Southern European countries and Romania are less affected.
• Energy-dependent sectors, particularly oil refining and power generation, transportation services, base metals and chemical industries, will be affected as Europe uses Russia as an input supplier.
• Production in the automotive sector, various machinery and equipment – ​​sectors which also have one of the longest global value chains (GVCs) – semiconductors and construction will be affected by the supply of metals.

Delivery times and the growth in input prices have eased, but shortages of materials and labor are reaching historic highs in the EU in industry, construction and services. According to the European Commission’s business survey, more than 50% of industrial companies in the EU face such shortages of materials and equipment that they limit their production. Labor and material shortages have also increased significantly in construction. Moreover, the Russian-Ukrainian war will also affect the transport and supply of raw materials, such as energy, food and metals, and will have a negative impact on production and prices.

We have developed an Index of Vulnerability to Supply-Side Constraints which ranks countries according to their shortage of materials and equipment, overall levels of capacity utilization, labor shortages and the strength of producer price growth. According to these indicators, Hungary, Denmark, Finland, Ireland and Germany are the countries most vulnerable to supply-side constraints. Southern European countries and Romania are less affected.

Some sectors are facing extremely large shortages

The most affected industries are the manufacture of motor vehicles, trailers and semi-trailers; electrical equipment; machinery and equipment; and computer, electronic and optical products, as the majority of companies operating in these sectors are facing severe shortages. Germany and France have the highest share of companies in these sectors reporting shortages hampering production.

The war between Russia and Ukraine will further aggravate supply chain disruptions by affecting transportation, availability and prices of inputs. The Russian war has already led to a spike in energy prices and has affected the prices of metals and agricultural raw materials, for which Russia and Ukraine are important players. Europe uses Russia as a supplier of inputs, particularly in oil refining and power generation, transportation services, base metals and chemical industries.

Judging by the data from the input-output tables, industry in emerging European economies is more dependent on oil and gas imports from Russia than from other EU countries. A 40% shortfall in oil and gas imports from Russia would lead to the highest production losses in Bulgaria, Lithuania and Slovakia. Bulgaria is the most vulnerable due to its large base metals sector as well as the utilities and refined oil production sectors that rely on imports from Russia.

The rise in prices and possibly the lack of these raw materials could distort not only the supply of energy, but also that of metals, which are important for the production of the automotive sector, various machinery and equipment – sectors which also have the one of the longest GVCs – semiconductors and construction.

The shock for European companies will of course not only relate to the availability of Russian inputs. Rising energy and other raw material prices, combined with higher labor costs, will put upward pressure on costs in general (through transportation, storage, electricity) and on demand. This development is likely to limit the rebound in global trade and further aggravate disruptions to global value chains.

Finally, transport costs will be affected by a sharp increase in the cost of fuel. The sanctions will lead to delays due to intensified checks and longer routes due to the boycott of Russian ports and the closure of Russian airspace. The sector will also face labor shortages, with Ukraine and Russia accounting for 275 thousand. of the 1.9 million seafarers in the world. This, combined with high fuel prices, adds to rapidly rising costs, increasing port congestion and reduced capacity.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.