Germany’s automotive industry faces large disruption from Ukraine war

LONDON (ICIS)–Germany’s big automotive sector is facing massive impacts from the Ukraine war – coming as automakers are still struggling with the semiconductor supply chain squeeze.

Automotive is an important end market for chemicals and plastics.

As is the case in chemicals and pharmaceuticals, direct exports to Russia and Ukraine play only a small role for Germany-based auto manufacturing – whereas Russia’s role as a supplier of energy and raw materials is huge.

Last year, only about 40,000 vehicles were exported from Germany to Russia (35,600) and Ukraine (4,100), for a 1.7% share of overall German auto exports, the country’s auto industry trade group, VDA, said in a report last week.

Meanwhile, German car makers produced about 170,000 cars in Russia last year, with most of that production sold there. Their market share in Russia is about 20%, VDA said.

In total, German car makers and car parts suppliers have more than 40 production sites in Russia and six in Ukraine.

RAW MATERIALS AND COMPONENTS
The Ukraine war and the sanctions are disrupting supplies of raw materials and components, as well as logistics. In addition, there are uncertainties over energy supplies.

Particularly affected are supplies of cable, wiring and “cable harness”, VDA said.

There are hardly any inventories for cable harness, which German and European automakers source from Ukraine, as well as Tunisia, the group said.

Cable harnesses are complex, labour-intensive components. Car makers cannot replace them, or find alternative sources, at least not at short notice, VDA said.

Meanwhile, key raw materials sourced from Russia and Ukraine will be in short supply, and their prices will rise, VDA said.

Neon gas: Ukraine is an important supplier of the gas, which is used in semiconductor production. The shortage of neon will further aggravate the semiconductor supply situation.

Palladium: The precious metal is needed for catalysators. Germany relies on Russia for about 20% of its palladium imports.

Nickel: The metal is needed to make lithium-ion batteries. Russia is an important supplier of nickel ore.

As such, nickel is vital for electric vehicle (EV) production – a sector in which Germany has been lagging China and the US.

Natural gas: While oil and gas exports from Russia continue despite the war, that could change soon.

About 55% of Germany’s gas demand in 2020 was covered by Russia.

About 27% of gas use in Germany goes as raw material into chemicals production, and thus indirectly into downstream auto plastics. The remaining 73% goes into energy generation, for industry and households.

In the short term, Germany will find it hard to replace Russian gas supplies, German chemical producers’ group VCI has said. While there are 26 liquefied natural gas (LNG) import terminals in the EU, Germany has none.

SANCTIONS
The sanctions imposed by the EU on Russia and Belarus, in particular financial sanctions, will also affect German auto makers.

In fact, in the west, Germany will be the country that will bear the brunt of the sanctions that have been adopted by the EU and the US against Russia, the country’s ambassador to the US, Emily Haber, said last week.

LOGISTICS
In addition, the Ukraine war further strains logistics, disrupting or stopping rail and maritime shipments. It is also jeopardising freight rail transport links to and from China.

These logistics issues will lead to stops or disruptions in many auto plants in Germany, VDA said.

Last week, Volkswagen (VW), BMW and other car makers said they would stop or curtail their production in Russia, and end exports to that country

Meanwhile, VW experienced production problems at German sites in Dresden and Zwickau, and it expects to see impacts at its main production hub in Wolfsburg – all because of the war-related disruptions in components, company officials told German state media group ARD.

IMPACT ON CHEMICALS
A typical vehicle contains a wide variety of chemicals, including polypropylene (PP), along with nylon, polystyrene (PS), styrene butadiene rubber (SBR), polyurethanes and methyl methacrylate (MMA)/polymethyl methacrylate (PMMA), among others.

As such, disruptions to auto production – not only in Germany, but also in France, Spain, the UK, and elsewhere – inevitably affect chemical producers.

Furthermore, the woes caused by the war in the past two weeks adds to those the industry has been suffering for months due to a global shortage of semiconductors, which has made it hard for car manufacturers to meet booming demand for new vehicles.

On 4 March, US credit rating agency Moody’s published a research note highlighting the economic woes which could result from a prolonged conflict in Ukraine, pointing to automotive as one of those that could be most affected.

“Russia and Ukraine dominate in global production of neon gas, a component in semiconductor manufacturing, which could further exacerbate chip shortages and supply problems in the auto industry,” said Kelvin Dalrymple, vice president, senior credit officer, at Moody’s.

“Furthermore, a portion of the feedstock for neon gas made in Ukraine is sourced from Russia,” said one source in Europe’s petrochemicals industry.

Other sources pointed to the close trade links between west Europe automotive manufacturers and Russian and Ukrainian suppliers of key components, like cables and cable harnesses.

“Demand has been at a low level for a long time due to the automotive sector lacking the needed chips but now, some car factories are in shutdown because of missing parts from Ukraine, so that’s impacting demand even more,” said a European glycol ethers producer.

“The auto industry is heavily reliant on cables from Ukraine and Russia. So, that adding to pressure from the semiconductors shortage, basically it is not good,” added an acrylonitrile (ACN) producer.

One European buyer of titanium dioxide (TiO2), a key feedstock used in paints and plastics applications, said the Ukraine war could slow down the nascent recovery for automotive.

“The automotive sector is heavily impacted [by the Ukraine-Russia war]. Russia is a back-up for key products [used in automotive] so, depending on how long this lasts, I don’t think people will have time to shift production elsewhere,” the TiO2 buyer added.

Front page picture: German automotive major Volkswagen’s main production plant in Wolfsburg; archive image
Source: Martin Meissner/AP/Shutterstock

Focus article by Stefan Baumgarten

Additional reporting by Zubair Adam, Eashani Chavda, Heidi Finch, Jonathan Lopez, and Jane Massingham

Please visit the ICIS Ukraine topic page

Please visit the ICIS topic page Automotive – impact on chemicals