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For want of a nail…

Readers will be familiar with “the butterfly effect” – mathematician Edward Lorenz’s description of how, within a complex system, a tiny input, like a butterfly flapping its wing, may cause dramatic changes, such as the location, intensity, and path of a storm weeks later.  Economist Steve Keen used similar modelling of our complex global banking and financial system to both predict and partially explain the 2008 crash – a relatively small decline in the rate of borrowing removing sufficient currency to implode the entire system.

Needless to say, this is not good news for the politicians and administrators charged with operating – or at least trying not to break – the network of supply chains which are the veins and arteries of an over-complex globalised real economy.  For all of the pretentions of grand policy aims – wars on drugs, poverty and cancer, “levelling up,” building back better or putting an end to the cycles of boom and bust – it is hard to find a government which didn’t serve to make matters worse than they had been at the start.  So much so, indeed, that one is tempted to conclude that periods of enforced non-intervention – such as the 589 days in 2010-11 that Belgium was without a government, or the three years when the UK government was gridlocked by Brexit – produce by far the better results.  And that the best government of all would be one which spent five years doing nothing at all.

Sadly though, as the ability of governments to succeed has declined, so the expectations of the public have had an equal and opposite increase.  Not only do we expect our governments to solve big issues like global poverty, renewed economic growth and the creation of energy systems which run against the laws of thermodynamics, but at the same time we demand they address such minutia as the politeness – or the absence thereof – on social media, and the pronouns we used to refer to someone when they are not actually present.  And predictably, the craven creatures who stand for election lack the courage to explain that these things are no longer within the gift of government, but instead claim to have the answers to all of our ills.  The inevitable results being governmental failure, further disillusionment with politics among the electorate, and the increasing popularity of demagogues at the extremes.

In such circumstances, a wise leader would choose to tread very lightly indeed.  For it is more likely that their actions will lead to chaos than to the desired outcome.  In the age of the Twitter mob, however, wise leadership is as common as the dodo.  Rather than standing up to the over-emotional outpourings of the mob, far too many political leaders seek to “get out ahead” of what they perceive to be public sentiment (even though the true public tends to be precisely the silent majority in such matters).  So it was, for example, that no sooner had social media users decorated their profiles in Ukrainian flags, poured their vodka down the sink, and deleted Tchaikovsky from their media players, than UK Foreign Secretary Truss was driving around Estonia in a tank… presumably in an attempt to win the Tory leadership by starting World War three early.

Fortunately, even as Russian cat breeds were being banned from cat shows, and several European states were implementing bans on the letter “Z,” cooler heads in the US Pentagon seem to at least have drawn the line at any direct NATO engagement with the Russians over Ukraine.  This was not sufficient though, to prevent Europe’s political class from imposing an ill-conceived sanctions salad upon a Russian economy that few had the first understanding of.  Many simply assumed that the Russian economy of 2022 was the same “gas station with nukes” that it had been in the years immediately after the 1991 collapse of the Soviet Union.  The idea that Russia might have re-invented itself in the course of those three decades seems never to have been entertained.  Still less the idea that Russian commodities might be at the beginning of the majority of supply chains which keep the global economy running.

Symbolically, the sight of Putin visiting the Vostochny Space Launch Centre to talk about working with China on manned missions to the Moon, just days after the German government warned of energy rationing, might give a clue to how this economic warfare is likely to turn out. But the obvious Russian leverage over supplies of food, oil seeds, and oil and gas to Europe are merely the effects which are large enough to measure at the outset.  It is not just Welsh steam railway museums which are threatened by a shortage of Russian hydrocarbons:

“Under a law put in place during Arab exporters’ oil embargo of the 1970s, German industry would be forced to curtail gas consumption in the event of a shortage, with supplies reserved for critical infrastructure and households.

“Such a step would cost Europe’s largest economy tens of billions of euros, estimates suggest, and could plunge it into recession. Union leaders have warned hundreds of thousands of jobs would be at risk.”

The problem with supply chains – a problem which our political class didn’t even know it didn’t know – is that we tend only to be conscious of the next person or organisation in the chain, rather than seeing the full complexity.  As I explained in my book, The Consciousness of Sheep:

“Imagine your own circumstances.  You probably get the water you need from a tap.  Your food comes from all over the globe, but is waiting for you in a local shop or a market.  Your clothes were made somewhere in Asia, but can be easily bought locally.  Heat and light arrive in your home via a national (or even international) energy grid.  However, you probably don’t know very much beyond this.  You don’t, for example, know where your gas was stored or which power station generated your electricity.  You can only guess which reservoir your water came from.  You don’t know which truck brought your food and clothes to the shop.  It is the same throughout all supply chains.  Manufacturers have no idea where their suppliers get their resources, labour and energy from.  They just trust that the finished components will be available in the correct quantities and of the right quality, and at the right time.  In the same way, the component supplier does not know how the raw materials are produced, or where their resources come from.  The component supplier simply assumes that these will be there on time and in the correct amounts…

It is only when supply chains break down that we glimpse just how complex the global economy really is:

“As an example, when the Japanese Fukushima nuclear power station was destroyed by a tsunami in April 2011, one result was that several car manufacturers around the world were forced to halt production because of a lack of bumpers.  These were in short supply because the only factory that made the black pigment for these plastic bumpers was located in what is now the Fukushima Exclusion Zone.  Similarly, when Iceland’s Eyjafjallajökull volcano erupted in April 2010, the resulting ash cloud stopped or limited air travel in Northern Europe until mid-May 2010.  One obvious result of this incident was that several heads of state, including Barak Obama and Angela Merkel, had to cancel their attendance at the funeral of Polish president Lech Kaczyński (a relatively inconsequential event, but it would be wrong to assume that important off-the-record discussions do not take place between heads of states on such occasions).  Less obviously, three of Germany’s BMW factories were forced to shut down because a key component that would ordinarily be delivered by air was unavailable.”

An even greater effect upon European supply chains in 2022 may come from something as small as a humble nail.  As the old poem goes:

“For want of a nail the shoe was lost
For want of a shoe the horse was lost
For want of a horse the rider was lost
For want of a rider the message was lost
For want of a message the battle was lost
For want of a battle the kingdom was lost
And all for the want of a horseshoe nail.”

In this instance, the nails in question are specialist nails made in Estonia to fit special machines which manufacture standardised pallets.  As Christopher Jehle at Heise Online explains:

“In Germany, pallets are almost exclusively produced in automated production lines. You need 78 nails for a Euro pallet and these nails were bought in the majority from Eastern European manufacturers in the EU, but 90 percent of their steel was sourced from Russia. The nails used require steel qualities that until now could almost exclusively be obtained from Russia and which can therefore not be ordered from elsewhere so quickly.

“Since the German production machines cannot be converted to other nails, millions of pallets could soon be missing here.”

Next to shipping containers, the ubiquitous pallet is essential to the way modern global supply chains operate.  Forklift trucks and warehouse shelving are designed around the standard size of a pallet, so that a load packed in, say, Shanghai can be seamlessly unloaded into a warehouse in Rotterdam.  And so, just as the supply chain crisis resulting from two years of Covid lockdowns came to be symbolised by containers stacking up on one side of the planet even as container shortages hampered shipping on the other side, the post-sanctions crisis may come to be characterised by cargo of all kinds sitting in factories for want of pallets to load it onto.

Nor does it help that a large part of the global production of pallets depends upon an ongoing supply of timber from Russia.  As Jehle explains:

“The fact that sawn softwood imports from Russia and Belarus are now subject to sanctions not only affects pallet production, but also the availability of transport boxes and cable drums. Depending on the type of wood, up to 25 percent of German imports came from the Ukraine, Russia and Belarus last year, including plywood, which is important for packaging.

“In the case of sawn timber for pallets and packaging, the dependence of important Baltic suppliers of local companies on Russian and Belarusian companies is now also having a negative impact. More than 70 percent of the softwood lumber imported in the Baltic States in 2021 came from Russia and Belarus.”

The shipping cost – already eye-wateringly high due to container shortages – of anything which has to be loaded onto a pallet or into a wooden container, then, is about to rise considerably.  And many processes – Jehle gives the examples of laying fibre optic cables and fitting wiring harnesses into cars – are going to be left on hold, causing further unemployment and shortages.

As with the more high-profile shortages in energy, fertiliser and food, no doubt some of the shortfall in timber for pallets can be made up from imports from other regions of the planet – although it would be wrong to assume that an economy which was already overshooting Earth-limits is going to provide anything like the volumes lost to sanctions.  And even where alternatives are found, the additional shipping costs and, indeed, demand exceeding supply, guarantees that the price is going to be significantly higher.  And since so much of the stuff we consume has to be transported on a pallet, this means that the price of everything else will rise accordingly.

If the European economies had still been enjoying their pre-2008 debt-based boom, they might, just, have been able to withstand the supply chain disruption caused by sanctions.  But in 2022, we were already suffering the economic effects of the lost decade between the Crash and Covid; the 2018 global peak in oil production and the ensuing energy price increases; the massively disruptive impacts of two years of lockdowns and the ensuing global shortages of oil and gas.  Each of these successive impacts on the global economy being greater than the last, with the unprecedented package of sanctions on imports to Europe and the USA set to plunge the western economies into a stagflationary collapse far greater even than the Great Depression of the 1930s… 

All for the want of a pallet nail!

As you made it to the end…

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