Escalation in Ukraine drives up prices and accelerates inflation

The escalation of the Russia-Ukraine conflict is being followed with great concern by German companies and seen as a growing threat to their own business. Many of the companies from the procurement sector recognise the critical situation and are making appropriate preparations to keep the damage as low as possible. "A recent member survey has given us an accurate picture of the mood in view of the expected negative effects on international supply chains and procurement processes," said Gundula Ullah, Chairwoman of the Board of the German Association of Materials Management, Purchasing and Logistics (BME). (BME), on Tuesday in Eschborn at the presentation of the "BME Pulse Check on the Russia-Ukraine Conflict".

CURRENT SITUATION

According to the results now available, almost half of the respondents assess the current situation as highly explosive. This is especially true in the case of a military conflict between the two parties to the conflict. In the event of Western sanctions, around 30 percent each see the restriction of trade routes and the halt of the Baltic Sea pipeline "Nord Stream 2" as having a direct impact on their business operations. "Our respondents currently see financial market restrictions as less dangerous. However, these sanctions could have a serious impact on all trade flows and should therefore not be underestimated," warned BME Managing Director Dr Helena Melnikov.

PRICES

Another key survey result: more than 90 per cent of the companies expect significantly higher purchase prices, which will further increase inflationary pressure. Energy and raw material costs in particular are likely to rise sharply. Furthermore, an increase in the price of end products is to be expected.

STRATEGY

Some of the respondents are considering a change of strategy in their companies. Almost two thirds (64 percent) want to switch to alternative procurement and sales markets. Almost 13 percent are toying with the idea of reducing their foreign direct investments in Russia and Ukraine. 23 per cent are reviewing the security of their logistics routes, procurement sources and cash flows.

The BME also wanted to know whether the buyers could promptly replace the goods and raw materials procured in both countries with supplies from other regions. Here the survey revealed that only a minority of companies (15 per cent) would not be able to buy these goods elsewhere.

The respondents have already taken or are planning concrete measures to minimise risks. For example, the search for alternative procurement options (double sourcing) has been intensified. At the same time, many companies (39 per cent) are increasing their inventories - as far as this is at all possible given the already tense procurement situation. The substitution of raw materials and materials is also being increasingly examined in order to reduce dependence on Russia and Ukraine. "The conversion of procurement away from the spot market and towards the futures market was also mentioned. This can especially keep the risk of price increases within tolerable limits," Ms Ullah explained.

SUPPLY CHAINS

A complete rupture of supply chains as a result of the disputes between Russia and Ukraine is feared by a good fifth of the respondents. However, more than 75 per cent of the participants expect that their companies will face restrictions or that procurement costs will increase. "This can be monetary expenditure as well as personnel resources and processes becoming more complicated," added Ms Melnikov.

The current conflict also sheds light on global developments: More than 70 per cent of the participants see clear risks in relation to the New Silk Road trade routes.

Source: BME, Photo: Fotolia