March 10, 2022

 

Which Markets Will Feel the Impact of Russian Sanctions?

Annacaroline Caruso, editorial associate

Countries worldwide continue to unleash tough economic sanctions and export controls on Russia in response to the ongoing conflict in Ukraine, the latest development being a U.S. ban on all Russian oil imports. While these measures are meant to hurt Russia’s economy, businesses outside Russia are not completely safe.

“The sanctions on Russia will also have a substantial impact on the global economy and financial markets, with significant spillovers to other countries,” warned the International Monetary Fund (IMF) in a statement over the weekend. “In many countries, the crisis is creating an adverse shock to both inflation and activity, amid already elevated price pressures.”

But certain countries and industries will feel the economic impact of sanctions more than others. For example, much of the world’s palladium, aluminum and neon gas supply comes from Russia and Ukraine, all of which are essential in auto manufacturing.

Other commodity prices have responded to the uncertainty as well. “The London Metal Exchange (LME) was forced to halt nickel trading and cancel trades after prices doubled on Tuesday to more than $100,000 per tonne in a surge that sources blamed on short covering by one of the world's top producers,” U.S. News reported. “The LME’s shock move came as Western sanctions threatened supply from major producer Russia and marked the biggest crisis to hit the 145-year-old exchange in decades.”

According to a Bloomberg report, “nickel surged as much as 62% in one of the most extreme price moves ever seen on the [LME], as fears over Russian supplies leave buyers exposed to a historic squeeze. Other base metals also surged, with copper and aluminum touching record highs before gains ebbed.”

Agriculture is another market that can expect to see a shift due to the conflict between Russia and Ukraine. Both countries are major exporters of wheat, corn, barley and fertilizer. As Ukrainian farmers are forced to abandon their fields and Russian exports are halted, prices for those commodities are expected to rise.

“Wheat prices are already up to anywhere between 30 cents to 85 cents a bushel, and 85 cents is the maximum price allowed by the market today,” said Chad Hart, Ph.D., associate professor of economics at Iowa State University (Ames, IA).

While American agriculture could benefit from the bump in selling price, the profit will likely be offset by the rising input costs of fertilizer and feed, Hart added. “Not only are we seeing higher prices but also price volatility, and prices will keep moving up and down very quickly as long as this conflict continues.”

Similarly, “The global automotive industry has needed to withstand the pandemic, supply shortages, price volatility and now the crisis in Ukraine,” said Ann Marie Uetz, partner at Foley & Lardner LLP, during a recent webinar from the Original Equipment Suppliers Association. “This crisis will likely drive the continued shortage of microchips and worsen what has already been a strained supply chain.”

Russia’s invasion into Ukraine could cut global automotive production by millions of vehicles this year, according to CNBC. “There’s no question. It’s going to ripple. It’s just going to be really dependent on obviously how long this goes on,” Jeff Schuster, president of global forecasting and the Americas at LMC Automotive told the news outlet. “The sanctions and trade impact play a big role in that.”

Even if your customers are not in the automotive or agricultural industries, they will likely still feel the squeeze of rising inflation caused by the war, said NACM Economist Amy Crews Cutts, Ph.D., CBE. “From a credit perspective, it will greatly depend on the type of firm and their exposure,” she said. “We may not see a widespread direct impact on domestic firms from sanctions per se, but many firms will be affected indirectly by the conflict’s broader effects. These are rising prices for most goods and some services and even greater disruptions to logistics networks and supply chains.”

More Inflation and Delays Expected to Drive Up Construction Prices

Bryan Mason, editorial associate

Inflation continues to takes its toll on the construction industry—fueled by spikes in commodity prices, supply chain disruptions and material delays. Sanctions on Russia, due to its invasion of Ukraine, have led to a further rise in pricing and supply disruptions. And the sum of these issues is expected to affect all parties along the contractual chain.

Communication throughout the chain can help soften the effects these issues will have on construction projects. “Communicate with your clients about pricing and the imminent inflation bubble we are facing,” said Ty Knox, ICCE, director of credit & risk for EFCO Corporation (Des Moines, IA). “Everyone is in the same boat, but you must be transparent to not be perceived as taking advantage of the situation.”

Knox and his team have begun evaluating their price list in anticipation of more inflation and an increase in raw material costs, he said. They also are discussing the potential use of surcharges if the war increases prices further due to supply chain or import delays.

For companies that ship standalone shipments—not part of a contract that spans weeks or months—price fluctuations won’t be too problematic, said Chris Ring, of NACM Secured Transaction Services (STS). However, lengthier contracts will likely face a stronger impact from inflation. “The cost of a 10-foot, two-by-four could increase exponentially in just a matter of days,” Ring said.

Material suppliers that can afford to stockpile will fare better, said Connie Baker, CBA, director of operations for NACM STS. Delivery delays and price increases related to those delays make this unrealistic, she continued.

Instead, Baker recommends including language in contracts to address these issues. “Suppliers need to protect their rights to pass the higher cost onto their customers,” she said. “The subcontractor also will need to make sure he can pass the cost up the chain too.” Today’s environment requires scrutinizing purchase orders and change orders for flexibility in pricing and delivery, Ring said.

Another issue facing the construction industry is the cost of gas. Construction firms use so much fuel-intensive equipment and material, and these items are costly to ship, said Ken Simonson, chief economist for Associated General Contractors of America. In response, suppliers should consider ways to add a fuel surcharge to their invoices that can be passed onto the subcontractor, which could then pass the fee along in its contract with the general contractor, Baker advised.

Although these issues have been exacerbated by the war, Simonson adds that the trouble really started in the fall of 2020 when the costs of materials went up in general. “The producer price index for all inputs, materials and services—including financial services bought by contractors—rose 25%, year over year, from June 2020 to June 2021. The most recent index, released in January, was up 20%.

“We did a survey back in December where 84% of our members said that costs have risen more than they had anticipated,” Simonson said. “Presumably, they had built [rising costs] into their bids for this year. Sixty-nine percent of [contractors] said they are putting in higher prices.”

Two strategies to potentially address rising construction costs include owners and contractors engaging in a price sharing agreement to prevent building large contingencies into contracts for future price increases, or owners agreeing to buy materials sooner to hopefully lock in a price and get supply on hand quickly, Simonson explained.

The survey mentioned above also finds that 72% of respondents said projects have taken longer than anticipated, he said. “So, for this year, 44% of the respondents said they’re quoting longer completion times.”

As ships continue to struggle getting out of the Black Sea and materials take longer to produce, Simonson predicts, “Another year of a lot of unpleasant surprises.” However, good communication and quick response between suppliers, fabricators, subcontractors, general contractors and owners is crucial.

“We’re looking to owners to be responsive and more flexible about pricing, providing quick answers when conditions change, and being willing to allow the substitution of materials from suppliers to avoid some of these supply chain bottlenecks and extreme price increases,” Simonson said.

Simonson, along with Amy Crews Cutts, Ph.D., CBE, NACM Economist, will provide further insight on the industry during NACM’s complimentary members-only webinar, U.S. Construction Outlook: Workforce Worries, Project Prospects, Supply Snags at 3pm EST on March 14.

Unlimited Webinars offer

Tips for Leading a Team During Times of Uncertainty

Annacaroline Caruso, editorial associate

Leaders have faced more obstacles over the last few years than ever before—between the pandemic, financial shocks and most recently the crisis in Ukraine. But being a leader means setting an example during good times and bad.

Uncertainty, no doubt, can create challenges for leaders who are normally expected to have a handle on everything. However, it is important to shift from a “know it all” to “learn it all mindset,” according to the Harvard Business Review. “This shift in mindset can, itself, help ease the discomfort by taking the pressure off of you to have all the answers,” the article reads.

In fact, challenges often create the best opportunities to grow. “Hard times don’t have to have a negative impact. This could very well be a defining moment, supplying everything you were looking for in the next step of your career,” reads a Forbes article on leadership.

The most important tip to remember when leading during uncertain times is to be honest. Don’t try to shield your team members from bad news by not informing them of any news at all. They will likely sense that you are not being authentic. “Managers often delude themselves into believing that if something isn’t discussed, then it somehow magically doesn’t exist. A manager’s inability to acknowledge it only serves to weaken the leader instead,” wrote David Siegel, author of the book, Decide and Conquer.

Your team looks up to you. In addition to being honest with them, their wellbeing should be a priority during any crisis. For example, with the crisis in Ukraine, “future-seeking leaders arranged for immediate employee relocations to safe areas both for the sake of employee safety and business continuity. For those employees unable to relocate, leaders have remained in regular communication through emergency channels, providing physical and emotional support where possible,” reads another Forbes article. “Lead colleagues through chaos by remaining calm, listening, and acting quickly and decisively.”

Finally, use this time to reach out and learn how other leaders are handling the difficult situation. Leaders need advice too, so don’t isolate yourself. “When I’m trying to make sense of a complex issue, the first thing I do is reach-out to people whose opinion I value and whose experience is in some ways different from mine,” a CEO told the Harvard Business Review. “It’s not so much that I expect them to have an answer, as I want to plug into their thinking and their sources.”

If you are interested in learning more on leadership, be sure to register for NACM’s 126th Credit Congress from June 5-8 in Louisville, KY. Several educational sessions will cover the topic, including Find the Keys to Unlock Your Leadership Superpower and Laws of Exceptional Leadership: How to Motivate Your Team and Inspire Action.

Unlimited Webinars offer

Using Tax Returns to Determine Your Customer’s Financial Position

Bryan Mason, editorial associate

Credit professionals are tasked with gathering information about customers to determine whether they are good financial risks. A customer’s tax return is one tool that can provide data to help make these decisions.

However, you have to ask for them—and not every customer will comply, said D’Ann Johnson, CCE, corporate credit and contracts manager for A-Core, Inc. (Murray, UT), during the NACM webinar, Tax Returns as Financial Statements. But if they do, tax returns can stand in the place of financial statements and provide the data points needed to compute crucial ratios. Whether your customer is a sole proprietorship filing Schedule C/Form 1040, a partnership filing Form 1065 or a for-profit U.S. corporation filing Form 1120, each of these forms contain enough information to serve as rudimentary balance sheets.

It’s always best to have two or more years’ worth of returns, so you can develop a trend analysis from year to year, Johnson said. (The forms used in this article are from 2020. Line numbers could change from year to year.)

The revenue, cost of goods sold and gross margin numbers (lines 3, 4 and 7, respectively) from Part 1 of the 1040 Schedule C form, and operating expense and net income numbers (28 and 31, respectively) found in Part 2 provide the data to perform a common size analysis.

Schedule L of form 1065 provides the details to compute current assets (lines 1, 2b, 3 and 6) and current liabilities (lines 15-17) in order to find current ratio, quick or acid ratio and working capital.

Net AR taken from Schedule L of form 1065 and line 1c on page one of the form provides the data to compute average collection period, while lines 1c and 3 of form 1120 do the same for gross profit margin. Net profit margin and net profit after tax also can be computed using lines 1c and 30 and lines 1c, 30 and 32 of form 1120, respectively.

Current Ratio—Find the customer’s current ratio by adding up its current assets and dividing by current liabilities. The value calculated shows the customer’s value of current assets for every dollar of current debt. This is important because liquidity measures short-term solvency, Johnson said.

Quick or Acid Ratio—Add up the customer’s current assets, then subtract its inventory value and divide by current liabilities. “Inventory is the least liquid asset,” Johnson said. “By removing it, you can gain a better understanding of what you might receive from the customer if something were to go wrong.”

Average Collection Period—First, divide the customer’s net sales by 365 (to account for the number of days in a year), then divide net AR by that value. This determines the average amount of days it takes your customer to get paid, Johnson said. Furthermore, it shows how quickly the customer is able to collect, which affects how quickly you will get paid.

Gross Profit Margin—Divide the customer’s net AR by net sales. “The gross profit margin shows how much money a company makes on every dollar, which can be used to pay down debt or invest into the company,” Johnson said.

Net Profit Margin—Divide the customer’s net profit before tax by net sales. This gives you the percentage of profit that customer receives, which can be used to pay the debts owed to you.

Net Profit After Tax—Divide the customer’s net profit after tax (earnings) by net sales. It is similar to net profit margin; however, this ratio shows if the client’s profit is based more in inventory considering it is after tax.

In addition to tax returns, credit professionals should consider looking at the customer’s bank statements if a customer is willing to share them, Johnson said. “Bank statements can be a treasure trove of information.”

Some red flags found on bank statements include:

  • insufficient funds or returned check notices
  • the age of the account (newer accounts may be riskier)
  • the business’ name or address not matching what is on the credit application or contract
  • cash flow from an investment withdrawal

“Combine the information collected from tax statements with information from NACM reports and trade groups to get a more accurate picture of your customer’s financial position,” Johnson said.

For more details on how to use tax returns, watch the on-demand version of the NACM webinar, Tax Returns as Financial Statements.

Unlimited Webinars offer

UPCOMING WEBINARS



  • Quick Loans for B2B
    Speakers: 
    Nancy Hannah, Esq., Partner and Attorney, Hannah Sheridan Cochran, LLP
    Duration: 60 minutes
  • JUNE
    25
    3pm ET

Unlimited Webinars offer