Perspectivas América Latina – Supply Chain Sanctions, Shortages, and Impacts

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In our second webinar of the “Perspectivas América Latina” series, we discussed impacts in the region´s supply chains, trades, and exports, with both an economic country risk and energy production perspective.

Maritime Trade Disruption During COVID-19 Pandemic Compounded by Russia-Ukraine Conflict.

In Latin America the bottlenecks at ports have not been as disruptive as another major container terminals in the U.S. and China. The main issue for Latin America has been exporters have faced delays in arriving to their main markets that are U.S. and China. And this has been delayed for, in some cases, up to sixfold.

These trade delays affect importers and are likely to put more strain on sectors that require imported inputs to operate in the region, such as agribusiness and manufacturing. And, this is being compounded by the Russia-Ukraine conflict, particularly if you consider that fertilizers, iron, and steel are the main commodities imported from those countries to Latin America.

And apart from that, in the region, we have the additional risk that unrest at ports and roadblocks are likely, and this is likely to further disrupt supply chain.

In agribusiness, the main effect has been the higher costs and scarcity of fertilizers. For example, Brazil imports more than 80% of its fertilizers and most of them are from Russia. So, what they are seeing now is a significant increase in their cost, fertilizers but also high fuel prices, which is likely to make that their next harvest is going to be very expensive while also will reduce the output.

For other exporters for perishables such as fruits, they are at risk of losing some of the product because of these delays and not being able to honor some contracts.

The manufacturing sector in countries like Brazil, Mexico, Colombia, the main effects have been delays on imports of inputs, shortages of raw materials and high costs. And connected to this, we have seen the automotive sector has been significantly affected by the scarcity of semiconductors as they are mainly produced in China and Asia. So, this has affected car manufacturers in Mexico, Brazil and Argentina.

Proximity Means Options for Mexico.

Mexico is right next door to the least expensive source of natural gas in the world. One of the biggest advantages that Mexico has is that, unlike all the other countries in the world, it can tap into this rich source of natural gas by pipeline instead of having to transform it.

The vast majority of this natural gas is used for power generation, which is an increasingly relevant topic because as the country in the future will move to a more electric grid, it needs a sustainable, consistent, and cleaner source of new energy, replacing coal and bunker fuel and other much more polluting fuels.

While the demand is growing in Mexico for natural gas, the supply is not, and the reason is the considerable underinvestment of natural gas production in Mexico that is in continuous decline.

Figure 1: Mexico monthly power generation by source.

What is next for Latin America?

Our baseline scenarios tell us the disruption will last into 2023. One of the main risks is unrest, and this will be triggered by inflation, protests and strikes, and high fuel prices and scarcity.

Additionally, there are the domestic issues that each country faces. For example, in Peru, we see that anti-mining protests, and roadblocks that are likely to cause disruption and financial losses.

Another big challenge for Latin America is infrastructure constraints. In many countries, there is not adequate infrastructure at ports, roads and railways, and this will continue to be a challenge for supply chains.