Supply chain risk assessment: the cascading effects of climate risk
Supply chain risk with systemic impacts refers to events that may happen at one point of a company’s supply chain and trigger severe instability through to the rest of the supply chain, the industry and even other sectors of the economy.
In our hypothetical case study example, iron ore is mined from sites in the US and China in the first stage of steel production. These mines are vulnerable to climate shocks and are increasingly exposed to the physical risks of climate change. The greatest of these is water risk, as water is a key input to mining operations and mines located in water-stressed areas may be disrupted during prolonged periods of drought. If both mining sites in the US and China experience prolonged drought, this could lead to STLfoundries becoming completely unable to manufacture steel products. If iron ore mining can't take place, the steel mills and plants won't receive the raw materials needed for steel production and will have to stop operation, at least temporarily.
In turn, prolonged droughts could cause a generalised iron ore shortage affecting supply worldwide, driving price increases, even if STLfoundries manages to receive supply from other sites. Research centres wouldn't receive samples as expected, and distribution centres wouldn't receive steel products. In the UK end market, sectors such as housebuilding and automotive, which are reliant on the steel products of STLfoundries, may be forced to purchase these goods elsewhere, likely at a higher price. This would have implications for the wider UK economy.
It's possible to quantify the percentage of the supply chain at risk and identify critical points in the supply chain that pose the greatest risk to the company’s operations. The propagating effects of systemic events on other sectors of the economy may also be quantified.
By identifying these critical points, companies can put mitigations in place. They may diversify supply sources, invest in resilient infrastructure at critical sites, secure comprehensive insurance, and implement real-time monitoring systems to ensure more robust and efficient supply chain management.
Site-level risk assessment: the macroeconomic impacts of political outcomes
Besides climate change risks, each STLfoundries site is also exposed to a range of unique external socio-economic risks. One of these is the political risk that could result from election outcomes, for example through the impacts of sanctions, trade wars or civil unrest. In 2024, elections will take or have already taken place in four of the countries where STLfoundries operates: the US, Venezuela, Mexico and the UK. These elections may result in policy and regulatory changes, and potentially be associated with economic and social instability.
Taking Venezuela as an example, we can assess the likely risks to the company from its operations here.
Nicolas Maduro has been the president of Venezuela since April 2013. During his tenure, the economy has contracted by over 75%, with up to 90% of the population living below the international poverty line, and inflation reaching 190% last year. Over 7.7 million people have left Venezuela as refugees and migrants, the vast majority since 2013. (Source: Chatham House, July 2024)
The presidential election on 28 July, for a six-year term starting 10 January 2025, brought hope for change due to international negotiations, potential relief from sanctions and global support. In 2023, the US relaxed some sanctions to encourage free elections, suggesting further talks if Maduro agreed to step down. Polls indicated the opposition could win by 20 to 30 points.
However, Maduro was declared the winner, a result that has been widely contested. Reports describe the election as “free but not fair” with experts calling the results a “statistical improbability”.
We've outlined the potential impacts of the election outcome on the economy, particularly the steel manufacturing sector, in Table 1.
Table 1: Economic risk assessment of election outcome in Venezuela
