Economic consequences of the war in Ukraine. Manufacturing industries, huge losses due to the global crisis

Deniza Cristian 26/09/2022 | 15:37

Instant Factoring, the Romanian fintech specializing in microfinancing for small and medium companies, launches a sector study on the challenges faced by the manufacturing industry as a result of the military-political conflict in Eastern Europe. The war in Ukraine has led the entrepreneurs of major industries to reduce production and sales forecasts for the next two years, according to the Financial Rating Agency S&P Global Ratings.

 

According to a report by S&P, the economic implications of the Russian invasion include the disruption of energy supplies and the closing of factories in Eastern Europe, as well as inflationary pressures in economies on rising prices of energy, food, and raw materials.

Many of the entrepreneurs interviewed by Instant Factoring said they are dealing with problems caused by the health crisis and exacerbated by the war, including supply chain failures and long payment terms.

In the context of the coronavirus pandemic, which strongly affected most sectors of the Romanian economy, companies operating in the production and service provision industry were no exception. Supply chain failures, staff shortages, or a lack of stable cash flow were just some of the causes that caused a 72.8% decrease in the volume of turnover from the provision of services in April 2020, compared to the previous month of the same year, according to data from the National Institute of Statistics. Furthermore, in the same period, there was also a 36.2% decrease in industrial production.

Since 2014, we have had constant growth, and in 2019 we reached a turnover of 670 thousand euros. In 2020, with the onset of the pandemic, 20 employees were placed on technological unemployment, and our turnover decreased by almost half compared to the previous year“, says Nicu Negura, the owner of the company manufacturing specific machines and equipment, AUTOLIV ROMANIA SRL.

When the effects of the pandemic faded and companies began to return to the normal flow of activity, they encountered new problems due to the military conflict in the neighborhood.

The beginning of 2022 came with a series of imbalances and unsettling perspectives at the global level, also determined by a difficult geopolitical context and exacerbated by the pandemic effects that are still felt on the market today. These elements were translated into reality in substantial price increases for raw materials, followed by the closing of some factories, an aspect that has considerably affected the large industries, for example, the textile and automotive industries“, explains Cristian Ionescu, CEO of Instant Factoring.

The first economic effect that the start of the military conflict in Ukraine had was the increase in the prices of raw materials. Just six weeks after the outbreak of the war, the producers registered a 25% increase, according to Tiberiu Stoian, entrepreneur and founder of the Exonia factory.

The issues at the level of supply chains were heightened by the problems that arose both at the level of the raw material and due to the increase in the prices of the finished product.

With the increase in fuel prices, the cost of raw materials has been added to the cost of transportation. Many manufacturers were affected because they depended heavily on few suppliers and most of them were from the Russian Federation. The greater the share of Russian suppliers in the supply level, the more manufacturers face syncope. Also, many merchants who worked with a small number of producers were affected, even if they were European because they also reduced their production because they sensed that there would be a reduction in demand”, points out Tiberiu Stoian.

Supply chain syncopes have worsened, payment deadlines have increased, and raw material prices have doubled for some manufactures. Specific machinery and equipment manufacturing companies have encountered problems in 2020 due to the decrease in demand, and now the biggest problem is the very long delivery time of raw materials, which is why they cannot honor projects on time.

If a project takes too long, it means extra months to pay salaries, pay rent or utilities. We already have two projects that were supposed to be delivered at the end of August, but we couldn’t honor them because we have some components that didn’t arrive until September. This means that we will not deliver to the client on time, and it will not be good for us either, because to these delays are also added the payment terms of 60 days“, explains Nicu Negura.

Daniela Binselan, who has a company active in the same field, explained that the prices for certain raw materials fluctuate a lot, which complicates the supply process:

As for ferrous and non-ferrous raw materials, it is more difficult to supply and the price changes from one hour to another. I couldn’t say how much, but we receive price offers for certain metals, and on the offer it says that the price is valid for 2 hours or a day“.

It is not just the machinery and machinery industry that has suffered from supply chain problems, but also the corrugated board industry. The production cost of paper and cardboard reached a record price

in May 2022, when it reached the threshold of 134.7%, compared to August 2021 when it stood at 109.71%, according to EUROSTAT data.

„The Europe shut down its pulp production at the beginning of the pandemic, which led to a drastic drop in paper production, with many mills closing due to lack of orders. Most manufacturers faced supply problems, and when things got back to normal, the war began. The costs of paper and cardboard have now doubled compared to last year”, explains Nicolae Oprea, the owner of a company producing corrugated cardboard.

To deal with these problems, entrepreneurs looked for solutions to help them continue their businesses. Therefore, some of them turned to factoring, a financial service that offers the possibility of collecting invoices before the due date. With the money obtained from factoring, the owners of the companies were able to pay for the raw material, keep their employees loyal through salary benefits, or make investments for the development of the company.

We have invested heavily in production capacity and workforce. When the orders dropped I had to make a big capital infusion to give the employees certain benefits and convince them not to leave”, says Gabriel Pop.

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