Supply Chain Resilience

Speaking on September 10, the President of Ukraine said:

This will be the most difficult winter in the whole world… Russia is doing everything to break the resistance of Ukraine, the resistance of Europe and the world in 90 days of this winter. Because this is what Russia hopes for. This is its last argument. The last one, I am sure of it: the cruelty of the winter period, which is supposed to help when the cruelty of man is not enough. And we must be ready – not to break down, not to split, not to deviate from our path. There are 90 days ahead, which will be more crucial than 30 years of Ukraine’s independence. 90 days that will be more crucial than all the years of the existence of the European Union. Winter will determine our future and the risks.

This week’s controlled shut down of the Zaporizhzhia Nuclear Power Plant reduces Ukraine’s grid capacity by 5700MW or almost one-tenth of the nation’s pre-war electric generation capacity (more and more).

What Russian cyberattacks did not achieve is now being advanced through military actions and intimidation.

Earlier this week Euronews reported, “Russia has been accused of attacking power stations and other infrastructure in eastern Ukraine on Sunday, which caused widespread outages. The bombardment ignited a massive fire at a power station on Kharkiv’s western outskirts…” (more)

Forty-four natural gas-fired power plants contribute about 10,000MW to grid capacity. Ukraine’s natural gas storage facilities are less than one-quarter filled.

Coal stocks are, however, reportedly more than double 2021’s winter-ready inventory. Since June Ukraine has banned all coal and most energy-related exports. Twenty-one coal-fired plants constitute more than one-third of Ukraine’s grid power capacity. Coal-fired capacity can be maximized, but is not sufficient to replace lost nuclear or natural gas. Overall demand for electricity has fallen due to war-time economic disruptions. New capacity is being developed, but is unlikely to be available this winter.

Still, Ukraine apparently now has sufficient confidence in its coal-fired capacity that it may provide urgent support to neighboring Poland. While Poland is Europe’s largest coal producer and exporter, before the war Poland was also a major importer of cheap Russian coal (sell high, buy low). Since April Warsaw has banned imports of Russian coal and is now facing a significant shortfall in stocks needed for electric generation and household heating using lump coal (more and more and more).

Ukraine’s calculus seems to be: If our coal plants continue to operate, we have sufficient coal stocks and replacement flows to generate at capacity. We cannot use more coal than current capacity. If the Russians continue to attack our coal plants, we will not be able to fully utilize these coal inventories. Earlier this month, President Zelensky said, “We have sufficient volumes for ourselves and we can help our brothers to prepare for this winter.”

Since March 2020 American consumers have wanted more of many food products than there has been capacity to supply these food products (more). The first chart below displays real personal consumption expenditures for food. The second chart shows an index for US food manufacturing. Even after several months of consecutive declines, food demand remains well above 2019 levels, while food manufacturing outputs have remained consistent with or only slightly above 2019 levels for most of the last two years (more).

Given this imbalance of demand and supply, prices have increased to test the depth and persistence of this demand. Given the tight labor market, volatile operational costs, and recent increases in the cost of capital, suppliers have been reluctant and/or constrained in their ability to increase manufacturing capacity. Increasing food prices have (as the real PCE chart below suggests) begun to re-balance demand in the overall food category. There is still a ways to go before supply capacity and real demand are balanced.

This morning’s Consumer Price Index for August confirms that US food prices continue to increase. According to the Bureau of Labor Statistics, “The food at home index rose 13.5 percent over the last 12 months, the largest 12-month increase since the period ending March 1979.” (See third chart below.)

These price increases and their rate of change are reducing real demand. As of the end of July there was roughly $40 billion in “excess” monthly food demand still to be shed. The August PCE will almost certainly show more such shedding. Once the excess is mostly gone, the CPI arc should begin to flatten or even decline… as long as pre-pandemic sourcing, manufacturing, and distribution capacity can be maintained. On a seasonal basis, the US food manufacturing sector is — so far –demonstrating an ability to fully deploy existing capacity. In July 2022, for example, this sector produced a bit better than three percent more than July 2019.

[Update Below] Yesterday, September 6, at 17:48 Pacific Time the California Office of Emergency Services sent the following mass text message:

“Conserve energy now to protect public health and safety. Extreme heat is straining the state energy grid. Power interruptions may occur unless you take action. Turn off or reduce nonessential power if health allows, now until 9pm.”

In the next seven minutes demand for grid power declined 1.2 gigawatts and continued to drop. See chart below (more and more and more). An emerging — potentially cascading — threat to sufficient supply was mitigated by well-timed, well-aimed action that engaged a well-prepared target.

September 8 Update: Wednesday evening and overnight headlines are once again similar to California Avoids Blackouts (more and more). When a big risk avoided is also big news, the risk context is clearly higher than desirable.

September 10 Update: Supply and demand continued to play cat and mouse with California’s grid. Late this week a second cat — in the form of tropical storm Kay moving north from Baja — increased risks (more). But as Kay bounced into the heat dome, SoCal temperatures fell and the new cat turned (mostly) out to sea. (More on demand management and related duck curves from a UCLA engineer.)

[Update Below] Grain and other agricultural flows from three Black Sea port are persisting (see first map below). Reuters reports, “A total of 61 cargo ships carrying around 1.5 million tonnes of food have left Ukraine under a deal brokered by the United Nations and Turkey to unblock Ukrainian sea ports…” (more)

This Black Sea flow is now sufficient to effectively compete with Australian grain exports to Asia. According to S&P, “when Ukraine started offering wheat in Asia in early-August, payment and banking issues as well as high freight cost and insurance were key concerns. However, as the flow of ships from Ukraine increased, confidence in cargo execution has grown, an Indonesian buyer said.

Ukraine’s principal port at Odesa is less than 100 miles from the frontlines at Kherson (see second map below). The fragility of current flows were underlined on Tuesday when Russian artillery hit grain silos at Mykolaiv (not one of the ports protected under the UN/Turkey agreements with Ukraine and Russia).

September 2 Update: As a quick mention in a round-up of several food-related reports, Bloomberg notes, “The grains sector has reduced a price spike of about 40% in the first half to around 10% this year to Aug. 30 as the Corn Belt harvest approaches. The bias is tilted toward a downward phase of the commodity price cycle into year-end…” Canada’s harvest looks good. US grain production has been mixed. Not bad overall, but not good enough to make up for shortages elsewhere.