Medium and long-term knock-on effects of the war in Europe on global sectors trends: will there be resilient sectors?
In the short run, all sectors for which Coface publishes sector risk assessments in six regions worldwide1 will be impacted by the knock-on effects of Russia’s invasion of Ukraine on 24 February. As explained in Coface’s article on the matter published in March2, we expect a majority of sectors for which we publish sector risk assessments to be hit directly or indirectly, including: metals, the petrochemicals sub-sector3, automotive, transport, textile-clothing, paper and agri-food, with disparities according to companies’ position in the supply chain or geographic location. While analysing the abovementioned sector dynamics and outlook, this article examines those that Coface foresees as being relatively resilient in the medium to long-term4.
The most resilient sectors and sub-sectors are expected to be media5 (an ICT sub-segment), pharmaceuticals and a sub-segment of specialty chemicals. They have in common a combination of various factors. There are countercyclical sectors, of which products and dominant market positions are concentrated in specific parts of the world: primarily Asia, the U.S. and to a lesser extent Western Europe, mainly in advanced economies.
Moreover, there are high-tech and innovative industrial activities, with strong barriers to entry for new actors, requiring important long-term research and development investments. De facto, they are concentrated in a few leading global companies for each of them.
In the medium to long run, the most impacted sectors are likely to be the most cyclical and energy intensive, such as, petrochemicals, paper, transport6 and textile-clothing. These are typically cyclical sectors, which have been challenged for several years by technological innovations, enhanced environmental regulations and the evolution of consumers' preferences. This, in a context where all sectors worldwide and global trade are likely to be impacted by the continued negative knock on effects of the COVID-19 pandemic, notably materialized by the Shanghai port lockdown in China, due to the authorities' zero-Covid policy. According to UNCTAD, China represented about 15% of global trade in 2020. By the time of writing, this lockdown has been ongoing for over a month.
The above-mentioned sectors expected to be the most impacted by the medium and long-term spillover effects of the war in Ukraine, as well as the port of Shanghai lockdown, have to face those shocks starting from different financial situations. There are, for instance, important disparities between the different transport sub-sectors. In the first quarter (Q1) of 2022, sea freight profit was 28% of its turnover, while air transport registered a loss of 11% of its turnover (see Chart 2 in pdf).
The paper sector is quite illustrative of the sectors that are expected to be the most impacted in the medium-term. It faces the challenges of the ongoing global digitalization of the economy and social use. In the long-term, it remains to be seen to what extent the retail sector (linked to textile-clothing) will be impacted.
As mentioned in our macroeconomic study on the matter7, since households expect a marked deterioration in their personal financial situation and in the overall economy, a negative impact on the retail sector in the medium-term is likely, with disparities from one region to another.
However, with the materialization of some buffers implemented by governments, such as food stamps for the most vulnerable segment of the population or energy price subsidies in Europe, the impact on the retail segment might be relatively subdued. In this regard, a correlation of a potential rise in company insolvencies globally with this crisis will have to be monitored carefully, in light of possible government policies to contain such a phenomenon.
Indeed, during the peak period of the COVID-19 crisis (back in spring 2020, when half of humanity was under lockdown), governments' support to companies and households, particularly in advanced economies, have contributed to contain insolvencies overall.
Given the vital dimension of the agri-food sector, the consequences of the challenges it faces from high food and inputs prices, combined with shortages in fertilizer supply, are critical, as they could threaten global food safety, as well as triggering political instability, notably via hunger riots. According to the results of Coface's model on vulnerability to high food prices and dependence on energy prices by region, Southern Asia and Africa are the most vulnerable regions, with over 225 million people being vulnerable to food insecurity worldwide.
In the agri-food sector, as well as in energy and petrochemicals, it is worth mentioning that not all companies within the same sector will be affected to the same extent by the war in Ukraine. It will depend on whether they are upstream or downstream in the supply chain. Overall, most sectors are expected to be affected by continued supply issues in the medium-term, as those will be exacerbated by the war, particularly regarding energy (especially in Europe) and cereals (Ukraine, Russia and Belarus being large cereal producers), in addition to the ongoing disruptions in semiconductors supply that started early last year, mainly because of the post-pandemic economic rebound. The longer the war lasts, the more likely it is that a demand shock will materialize, making the global environment even more adverse.
That being said, in the long-term, we also expect a gradual adaptation of both consumers' and companies' habits (energy savings, shifts from wheat flour towards alternative ones), as well as a shift in supply chain organization. The latter will definitely have an impact on global supply chains. For instance, crucial rail freight routes between Europe and China, which used to cross Russia, are now developing outside the zone via the middle corridor (this route is not under sanction at the time of writing). Just like the COVID-19 crisis' impact on global sectors trends, this new shock is likely to act as a catalyst to significant transformations on both supply chain organization and consumer habit.
What to expect for the agri-food sector?
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1 - North America, Latin America, Asia - Pacific, Central and Eastern Europe, Western Europe, Middle East & Turkey.
2 - See Coface Focus: Russia-Ukraine conflict: stagflation ahead, 7 March 2022 by Coface Economic Research Department,
3 - In Coface's sector risk assessment methodology, the chemicals sector comprises three sub-sectors: petrochemicals, specialty chemicals and fertilizers.
4 - In this article, given the very volatile global geopolitical environment, the medium-term is defined as an outlook of approximatively six months from now. Long-term is defined as a period between six months and a year from now.
5 - Coface's sector risk assessment methodology for the Information and Communication Technologies (ICT) sector incorporates several segments: telecommunications, electronics, media segment & a final one composed
by computers, software and IT equipment.
6 - According to Coface methodology, transport includes rail, maritime, road and air transport sub-sectors.
7 - See Coface Focus article - War in Ukraine: Many (big) losers, few (real) winners, 3 May,2022, By the Coface Economic Research Department, in collaboration with Institut français des relations internationales (IFRI)