The global supply chain has taken multiple hits since 2020 and the advent of the COVID-19 pandemic. With contractors struggling with existing supplies, how will Russia’s invasion of Ukraine affect global transit and supply?

Construction Executive conducted an exclusive interview with Patrick Ryan, vice president America at Linesight, a consultancy firm that issues a quarterly commodity and materials cost report. Benefiting from a range of experience across the United States, Ireland, United Kingdom, France, Hungary and Middle East, Ryan discusses his insights on the developing situation in Ukraine, how it will affect the supply chain, and how to face these challenges in real time.

Q: The supply chain was already slowed due to COVID-19—how drastically will the war in Ukraine slow the global supply chain?
A: The Russia-Ukraine conflict has resulted in a resurgence of volatility in the pricing and availability of critical commodities, such as oil, gas and steel, as well as a number of other construction materials. Any improvement to the supply chain was minimal prior to the commencement of the conflict. Going into 2022, supply chain forecasts were generally predicting a stabilization of prices—albeit at higher levels than 12 months previous.
Now, we are expecting a fresh round of delays and disruption to the supply chain as inventories are depleted and demand continues unabated.
Sanctions will have the most significant medium- to long-term impact. Russia and Ukraine are major global exporters of crude oil, gases and metals such as steel, palladium, nickel and platinum. These materials impact the supply chain at many levels of manufacture and production, costs are expected to rise.

During 2021, construction materials increased in price by more than 25% and the cost of delivering U.S. domestic construction projects increased by approximately 13%.

All signals are that the supply chain is now entering into a period of unprecedented delay and disruption; companies need to deploy a strategic approach to migrate the negative impact the supply chain is going to have on project delivery.

Q: How will that affect U.S. construction companies?
A: Ultimately, the knock-on effect will be project implementation delays, increased costs and schedules on construction projects and uncertainty in investment decision-making.

Price increases create additional business risk for construction companies. Companies that have entered into fixed-price contracts are going to face margin pressures due to increased cost of project delivery. U.S. construction companies will need to undertake quantitative risk analyses on all projects to identify and quantify supply-chain risks.

Q: What supplies will contractors see less of? Which materials will escalate in price?
A: Raw material supplies required for manufacturing may become the source of some of the bigger supply chain issues. For example, the United States imports vast quantities of pig iron, which is used in the production of steel. As Russia exports almost 60% of the worlds pig (aka crude) iron, it is very likely that domestic steel manufacturing will be impacted.

Although the United States has one of the largest domestic steel productions, it is still one of the largest importers of steel from other countries. With Russia’s contribution to the global steel supply chain being limited and/or reduced, pressure will come on other major exporters such as China, Japan and South Korea to fulfill global demand. It is likely that the United States may look to steel producing countries closer to home, such as Canada, Mexico or even Brazil—but in these countries the ability to rapidly increase capacity is limited.

Depending on how the crisis continues to unfold and how much further the supply of materials from China is impacted, U.S. contractors could see some major impact on the supply of silicone and glass products. China produces two-thirds of the world’s silicone products and the United States is a big customer. On the glass manufacturing side, the United States has the ability to scale its existing operations—but at what cost to the current price of glass?

Examining recent U.S. initiatives to invest in chip manufacturing, which is long overdue, immediate concerns appear regarding the supply of the raw materials required to make these chips. Neon gas supplies are indispensable in chip production and 50% of the global supply comes from Ukraine which purifies gases from Russia’s steel industry. This is despite efforts to diversify the supply chain after the 2014 crisis in Crimea when the price of neon increased 600%.

Equipment supplies manufactured in Asia—such as electrical switchgear, motors, pumps and even specialized manufactured equipment, such as bio-reactors—could all see further shortage of supply in the coming months. This part of the supply chain experienced major disruptions during COVID-19 that caused delay and increased cost to many high-tech projects.

Increased oil and gas prices obviously impact transportation costs for the supply chain, making it more expensive to move materials to construction sites. As crude oil prices surge, they will have an additional effect on the price of steel given the role of oil in steel production.

Metals such as copper, nickel and platinum have already been impacted by the crisis, with Russia controlling about 10% of global copper reserves, as well as being a major platinum and nickel producer. Russia accounts for 17% of the global top-grade nickel production, and the material recorded an unprecedented spike recently (up 250%), forcing the London Metal Exchange to suspend trading on it.

Q: What does this mean for sustainable construction materials?
A: There could be a positive outcome here for sustainable construction materials due to the global disruption of the supply chain. The importance of strategically considering regional and locally manufactured products can only promote the increased use of sustainable construction materials. In fact, any product sourced locally can have a positive impact on the carbon footprint of a project.

Recycled plastics are playing a key role in developing sustainable construction materials. The United States can now produce building insulation products, lightweight concrete products, windows and structural lumber from recycled plastics. If the future of supply-chain focus is local or regional, the industry could see increased demand for building products made from recycled plastic. With the rising cost of fossil fuels, renewable energy sources may start to play an important role in future manufacturing energy consumption.

The United States is one of the world’s largest manufacturers of solar panels—could a focus on renewable energy sources drive higher demand for solar energy? It depends on how high crude oil prices reach and for how long.

Unfortunately, there are also price hikes in store for some sustainable materials. Lumber prices have increased significantly during the last two years, admittedly more influenced by Mother Nature than global supply chain issues, but the current situation could see pressure on global lumber supplies translating to further price hikes.

Q: What can contractors do to prepare?
A: The first approach may seem obvious, but early purchasing of materials and securing pipeline for a project can greatly reduce the impact of disruptions to the supply chain. The problem here is that it would involve changing the way the construction industry works. For as long as can be remembered, the industry approach has been a “just in time” model, which is obviously based on a low-risk supply chain.

Project owners, designers, contractors and suppliers should develop a strategic approach to managing the risks associated with today’s global supply chain. Hiring a designated team of experts to develop and executive project delivery strategies that migrate risk and reduce the cost of project delivery can assist with these risks.

Q: Will these issues worsen if the conflict extends for a longer period or has the damage been done?
A: The longer this crisis prevails, the worse matters will get. Materials that contractors may possess in medium-term supplies will join the list of materials in short supply due to the impacted global supply chain.

One of the most significant issues will be the supply of oil and gas at reasonable prices and prolonged disruption will have a direct impact on the cost of construction projects.

Q: What is the future of the supply chain?
A: As supply bottlenecks arise from both Russia and Ukraine, demand for alternative sources will increase. We will see a move away from globalization of the supply chain and more focus given to “find it locally.”

A departure from the “just in time” model is essential to mitigate the risks associated with the latest disruptions, delays and price hikes. Prefabrication and modularization will be important investments to secure ensure project delivery.

Renewable energy sources may become the catalyst to a surge in local sustainable construction material manufacturing. In a globalized supply chain, the impetus is cheaper and faster with little regard to environmental impact, the United States now has the opportunity to build locally sustainable manufacturing hubs around the country.

Lastly, the biggest single impact on the global supply change is coming! Technology will soon advance our supply chain to the world of electrically powered autonomous delivery trucks, which, considering recent supply chain impacts, could not come sooner.