More Procurement & Logistics Resilience for Donau Chemie

DonauChemie-Pischelsdorf-Industriepark

Krystle Lippert, Strategic Sales Manager at GrECo in Austria, has spoken with Dr. Gerald Dums, Head of Purchase of Technical Equipment & Logistics at Donau Chemie AG about supply chain problems and procurement and logistics resilience.

The past years have shed light on the downsides of the very same globalization that has been responsible for stable economic growth for a long time. The consequences of recent negative events are disruptions in trade and supply chains, order backlogs, rising energy and transport costs, and more. Whether earlier events or most recent geopolitical developments, such as the war in Ukraine, nearshoring and so-called “glocalization” are now moving into our focus.

Lippert: Donau Chemie recognised the changing trend long before the pandemic and the supply chain problems that followed suit. Out groundbreaking works for a new plant in Pischelsdorf to expand the product portfolio already began in 2019. It is Europe’s first production plant for amidosulfonic acid. What brought about this decision and which role did short distances play for procurement and sales?

Dums: Short distances in procurement and sales and therefore proximity to customers are part and parcel of our corporate philosophy. Besides the quality and availability of our products, our customers really value our other pillars of success: our personal service, the short response and delivery times as well as our solid reliability.

Because of our customer proximity we knew that the European market cannot provide amidosulfonic acid and relies on Asia for deliveries. This triggered more research and eventually the erection of a new plant in Pischelsdorf. The ready availability of the raw materials and the perfect storage and distribution opportunity on site in Lower Austria positively impacted on the feasibility study.
 
Lippert: Since there are no similar plants in Europe for this core process, there must have been a huge influx of customers during the pandemic, especially since China still grapples with lockdowns. How important is procurement and logistics resilience for your customers?
 
Dums: During the feasibility study, we already received positive feedback from prospective European customers who signalled their keen interest in our idea to erect an amidosulfonic acid plant in Pischelsdorf. Increased flexibility due to shorter delivery times, more reliability and security of supply, no loss of quality due to long sea transport and rapid availability have become increasingly important for our customers, over and above a high product quality and more attention being paid to ecological aspects.

Furthermore, an additional European supplier also increases the procurement and logistics resilience of customers. The recent lockdowns showed the negative impact in a most dramatic way. Within days, goods were no longer available, means of transport became a scarce commodity, container vessels jammed harbours, and transport routes were closed. Customers desperately searched for goods and alternative transport facilities, at times to no avail.
Within weeks, the prices for the “white powder” skyrocketed. Building up new procurement and logistics resilience became the order of the day. The obvious dependence on producers and logistical flows supported our decision to plan and erect Europe’s only amidosulfonic acid plant in Austria.
 
Lippert: What is your experience with international competitors from Asia? How do your customers rate short-term availability vs. price?
 
Dums: The pandemic and the dispute between Russia and Ukraine have shown that the global flow of goods can quickly come to a halt, causing existential crises among customers. In the medium term, such crises will continue to have a significant impact on our world economy and dictate prices. That is why customers have shifted their focus on short delivery distances and a more stable (European) framework. We have used our strength as a local producer to our advantage and continued to provide our customers with important industrial chemicals despite tough conditions. Of course, product prices play an important role but reliable quality, supply security, flexibility, and short delivery distances have become crucial and decisive factors for customers. 
 
Lippert: At the GrECo Risk Day we learned that logistics experts expect the complexity of supply chains to trigger a bullwhip effect. Do you share this view?
 
Dums: Yes, indeed. The global production and transport sector’s current complexity and dependency needs an optimal setting to work. Any change or deviation in the system will cause a ripple effect at all levels. The consequences have already become visible and may hold more surprises in store in the years to come. Planning, transparency, and the implementation of resilient systems coupled with forward-looking management qualities will certainly be helpful.
 
Lippert: If we consider that globalisation and the search for increasingly cheaper alternatives was placed higher on the agenda than local added value and short delivery distances, do you think this behaviour is a conscious decision made by customers or is it rather driven by politics?
 
Dums: The principles of a free market economy and globalisation have undoubtedly contributed to the wellbeing of our society. It has its merits and still applies. However, in my opinion, a critical evaluation and an adaptation to solve the global existential survival crisis – and thus protect our planet – are desirable and necessary. Political decision makers are key in determining the course for future economic areas and the habitat we live in. The creation of long-term sustainable wealth must be our common top priority. The restructure of economic areas, transport routes and supply chains can contribute a lot in this regard. Our project for a new amidosulfonic acid plant serves as a prime example.

DonauChemie-Brueckl

Donau Chemie plant in Brückl, Carinthia

Lippert: Considering Europe’s energy crisis, does Donau Chemie also plan to erect new plants at new locations, and is Europe still an attractive manufacturing market?
 
Dums: Donau Chemie relies on organic growth. Over and above that, we are evaluating possibilities to expand our portfolio – like we did when we decided to bring the amidosulfonic acid production back to Europe – and tap into new markets. Alone in the last two years, we invested about EUR 35 million in our plant in Brückl in Carinthia. We erected a new distribution warehouse and filling facility, a new synthesis with heat extraction as well as a salt treatment facility for solar-dried sea salt.Container ship crews – mostly Asian – were no longer allowed to board or leave a vessel. Container ports came to a standstill, and the entire cycle of transporting and shipping goods was bogged down – until today.
Lockdowns which blocked the global economy ensued. As the restart did not take place simultaneously, the world economy struggled to restore its rhythm. Add to that the war, following Russia’s invasion of Ukraine. While Ukraine has become the main supplier of raw materials and intermediate goods for many industry sectors, the Western world saw itself forced to act by imposing sanctions on Russia.

Sanctions, not only harm Russia’s economy in the medium and long term but which negatively impact the energy supply chains of the Western world in the short term.

About Donau Chemie:

The Viennese based company counts among the largest in the chemical sector. It produces and distributes base chemicals such as clorine, sodium hydroxide solution, hydrochloric acid or calcium carbide, manufactures application-specific compounds, and produces and distributes activated carbons. Donau Chemie products are mostly found in consumer goods in the field of cosmetics, household and technology.

Dr. Gerald Dums

Leitung technischer Einkauf und Logistik Donau Chemie AG

Krystle Lippert

Krystle Lippert

Strategic Sales Manager GrECo International AG

T +43 664 962 40 37

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Geopolitics Shapes the World to Come

Geopolitics Shapes the World to Come

Our multipolar world and its myriad of geopolitical forces presents us and our clients with a vast, multidimensional array of risks. As bleak as this may sound, geopolitics and its impact on energy also offers a number of opportunities.

Poverty, unemployment and social strife

Energy price increases readily translate into increases in consumer and producer price inflation. This prompts households to cut down on spending, businesses to shut down as they cannot sell their products and services at sustainable prices, and rising unemployment levels perpetuate the vicious circle of recession and inflation. 

What may be seen as healthy belt tightening in affluent countries of the Western world, can in lesser developed countries reduce access to food supplies, electricity or running water.  Eroding living conditions could lead to large-scale social unrest and profound changes on the political scene, challenging international relations and shaking the world order even more then currently experienced.  Energy supply has been used by countries such as Russia as a vector for power projection for many years now and is currently used as a weapon of war not only against any single country, but to challenge the global status-quo.

Climate change

Assuring the security of energy supply requires rearranging existing energy production and delivery infrastructure around the world to reflect the new geopolitical reality.  Whilst in the long run it may bring about much coveted decarbonization and decrease in greenhouse gas emissions, in the short and medium term this would require increased levels of production and shipping of raw materials, energy carriers, parts and equipment virtually around the globe to build the requisite infrastructure.  This, in turn, means increasing the carbon footprint and global pollution, degrading the environment and accelerating the climate change processes.

Business risks

An increased volatility of energy prices (and resulting volatility of virtually all price indices that are impacted by energy prices) means increased levels of business risks for all entities undertaking any kind of business activity.  From oil traders through manufacturers to crop farmers, everyone can suffer or benefit from this as the maxima for both upside and downside will increase. 

This development will increase the demand for risk management services and all kinds of hedging or risk transfer instruments.  To some extent, this will require the assistance of modern technologies, such as artificial intelligence and big data. 

Energy asset prices

If the increases in energy prices are not a temporary feature but are there to stay (which might also result from factors other than geopolitical forces), it follows that price of assets used for energy generation, transmission and distribution will increase as well to in line with cash flows, they generate until a new cost-benefit equilibrium is reached.  The side effect will be increased competition for raw materials, parts, equipment, services and labour as everyone will be rushing into the energy sector to benefit from rising asset prices.  This effect can already be seen to a large degree in the field of renewable power generation and storage.

Technological advancement

The challenges of energy security in the light of global geopolitics, compounded by the demands of decarbonization to thwart adverse climate change present a vast spectrum of opportunities for innovators who can advance new technologies in energy production, delivery, storage, management and saving.  Whilst the invention of a breakthrough technology that could be deployed on a large scale to change the way the entire world operates is unlikely (although not impossible), there is a lot of room for incremental advances that, given increasing energy prices, will make research and development expenditures worthwhile for successful entrepreneurs.

Global development

It is estimated that the global scale decarbonization effort requires capital expenditures worth USD 1 billion every day until 2050.  This does not include the cost of responding to geopolitical challenges which, as far as energy is concerned, have been briefly outlined above.  This presents a huge challenge for business, governments, financial institutions, and individuals who all form a kind of global labour force tasked with making this change happen. It also offers tremendous opportunities for growth and development, for making the world a better place, more prosperous and healthy, and one that can offer more benefits to more people. 

GrECo – Making change happen

Geopolitics will still be a major factor impacting global energy markets and energy security across the world. However, if the world population manages to turn these challenges into opportunities, then increased prosperity and improved distribution of wealth across the planet could turn geopolitical forces into everyone’s favour. 
 
As all these processes will be impacting the global risk landscape in a major, perhaps unprecedented way, the years to come will be a challenging and hopefully rewarding time for the risk management and insurance community worldwide.  Our role during this time of change in the global economy and technology, prompted to a large degree by energy geopolitics and climate change, is to help make the transition process smooth and predictable to the fullest extent possible for those entrepreneurs and institutions that will be responsible for making this change happen.

Pawel Kowalewski

Practice Leader Power & Renewables Division

T +48 507 085 066

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The Perfect Storm – Managing the Geopolitical Shift in Construction

perfect storm - construction insuance

With the aftershocks of the pandemic, the ripple effects of the Ukraine war, and more frequent and severe natural catastrophes that affect our climate and today’s population, we are at a crossroads, and the construction sector is no exception.

In the wake of the Ukraine war and the world-wide vulnerability experienced during the Covid pandemic, priorities have changed. The pandemic and its economic effects disrupted our traditional understanding of what is a given and what is to be expected. It also accelerated what the common world view may have thought probable or even possible.  When the Ukraine war erupted, it revealed the believe that economic competition would remain the main battleground in our world.

All the while, the voices proclaiming that mankind had chosen a path that is neither sustainable nor compatible with the resources available would not fall silent. Nonetheless, seals and certificates distinguishing low energy, low emissions or sustainably produced products have gained increasing acceptance.

Construction challenged by sustainability and supply chains

In terms of the United Nations’ 17 sustainable development goals, urgent action needs to be taken to combat climate change (goal number 13). Is it just another empty resolution or is there more than meets the eye? The ESG framework has been called into life as a way of assessing companies’ environmental, social and governance performance. It takes a close look at the value creation chain from raw material extraction to the final product and incorporates circular economy principles of reusing resources where feasible. The construction industry is caught in the middle of it all.

Increased cost of materials and energy, rising inflation and a shortage of skilled and unskilled labour pose an unprecedented challenge to an extremely fragmented industry. Its big players often choose to subcontract the majority of their project work. Hence, the availability of subcontractors, the flexibility of their workforce and the accessibility of products and materials are key to even get started.

The pandemic and the Ukraine war have both shown how fragile optimized supply chains are. While efforts were made to optimize costs, maintain quality, and sustain just-in- time principles, companies had to grapple with reduced resilience as a side-effect. 

While resilience is essential, the disruption of life – at least in Europe – had an immediate effect on the construction industry, highlighting several areas of concern.

Where is the workforce?

Human resources became scarce. The workforce that used to be able to simply cross borders was no longer available. Travel restrictions were in place – whether due to the pandemic or the war – and many Ukrainian men went back home because they were enlisted in the military. This added to the problems which employers in the construction industry already experienced before the war.

Then there is the psychological effect. Investment decisions are heavily influenced by trust in a stable and predictable environment. Assumptions in financial models, allocation of resources and long-term commitments are all made against the background of expectations of how the world could look tomorrow. The new reality challenges decision makers in that they have to acknowledge that developments thought of being unlikely or just theoretical are realistically after all. Increased tensions between NATO and Russia ignited by a war in the middle of Europe were not something that would figure as a concrete threat scenario in many business plans. It will take time until trust and understanding of the changed dynamics settles in.

Shifting trends in supply chains


The global supply and value chain for construction materials can be divided into four distinct stages:

  • raw materials
  • material production
  • retail and
  • end users

Large companies dominate each step and assert their power, especially in the retail phase. The producers of raw materials are mainly global giants and very large aggregate mining providers who offer their large-scale production to leading international construction companies.

Their business must tackle the challenges posed by a construction materials market that is increasingly exposed to events around the world. Hence, the focus is shifting to reshoring, nearshoring and friendshoring.
As military conflicts, increased regulation, trade wars and inflation continue to present new risks, these supply chains will also have to adapt.

The cost of it all


Soaring energy prices, despite having already increased before the Ukraine war, exacerbated problems for the construction sector. Many of the materials used in contemporary construction are based on an energy-intensive production, with steel and cement being only two key examples. In addition to these highly relevant input factors hampering production, the construction operations themselves are equally affected, compounding the effect.

On top of it all, inflation leads to rising construction prices. This makes even public infrastructure authorities reconsider their investment plans in the hope that lump sum contracts or at least partly guaranteed contracts become available again.

Optimism prevails


While the above may seem to draw a gloomy picture, this is not the sentiment perceived in discussions with market proponents. A shift in priorities and a more acute awareness for the changing environment, coupled with necessary steps that need to be taken to move forward prevail. The focus is on productivity and increasingly also on sustainability. What seems to dominate the industry is an unwavering getting-things-done mindset despite the knowledge that there is change on the horizon which is approaching faster than expected.

Richard Krammer

Group Practice Leader Construction & Real Estate

T +43 664 810 29 63

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Geopolitics and Energy are Closely Intertwined

For the past years and certainly since 24 February 2022, we have had many opportunities to witness the power of geopolitics, its decisive impact on domestic and international politics and the supply of energy throughout the world. 

The geopolitical flow of energy

As far as the sources of energy are concerned, we must take a closer look at their primary and secondary dimension:

Primary sources of energy are those that are extracted (such as natural gas) or captured (such as solar energy), whereas secondary sources of energy refer to the products that derive from the transformation of primary sources.   Electric energy is a typical secondary source as it is the product of transformative processes such as controlled combustion of natural gas in a thermal power plant or conversion of solar energy into electric current within a photovoltaic power panel. 

Then there are the facilities that ensure the production and supply of primary and secondary energy – for example, refineries, power plants, electricity grids for transmission and distribution.  The infrastructure for production and delivery must be built and maintained in good order.  This requires parts and machinery to be produced from raw materials, most of which are available only in certain parts of the globe, and which need to be extracted, processed and shipped (often through many different countries) to factories (some of them being located in other parts of the world) and then transformed into OEM parts and equipment, which are shipped to the final destination (crossing once again many state boundaries). 
 
This constant flow of various forms of energy, raw materials, intermediate products, parts and machinery as well as the security of energy is dictated by physical and human geography – and its barriers.

Case in point: Coal vs. Clean Energy

An interesting example is Europe’s import of coal on a mass scale.  Under immense pressure from the European Union, financial institutions and a vast number of generously bankrolled activist pressure groups, many governments decided to scale down coal production, effectively not allowing any investment in developing new production infrastructure.  As with most extractive industries, the lead time from the investment decision to commencement of commercial operation is several years, especially when public procurement is required. 

Russia’s military invasion of Ukraine prompted a sharp increase in wholesale gas prices (approximately by a factor of three within several days). The ensuing uncertainty then prompted an increased demand for coal (a natural gas substitute for heating and power generation) both from businesses and private households as the demand could not be met by the decreasing domestic production. 

At the same time, several widely used coal transport routes become inaccessible because they originated in or passed through Russia or the war zone in Ukraine.  Wholesale coal price indices rose sharply as a result of skyrocketing global demand and contracting supply. For example, the ARA index often used by EU traders rose by about 140% in seven days since 23 February 2022 and in December 2022 traded at approximately a 30% premium from that day. But that was just the beginning. 
 
The additional demand from Poland alone, estimated at around 10 billion metric tons in 2023 (the equivalent of around 170,000 Panamax or up to 50,000 Capesize carriers), is putting significant stress on the existing transport infrastructure, including seagoing vessels, inland transit carriers, port terminals, transhipment and storage.  This infrastructure is generally finite and cannot quickly be scaled up: for example, there is a limited number of available dry cargo vessels or sea terminals capable of unloading and handling large amounts of coal. 
 
As is always the case, the vastly increased global competition for finite extraction and transportation resources translates into price increases and high levels of volatility until a new equilibrium is reached.

The security behind energy supply security

As far as the security of the supply of energy is concerned, we must consider two aspects.
 
First, there is the physical availability, which in simple terms answers the question whether a requisite amount of energy can be delivered to the destination in the required form and quantity.  For example, in December 2022, a large part of Ukraine was deprived of electric energy because both power plants and the delivery infrastructure (transmission and distribution grids) were, to a large extent, destroyed or captured by Russian military. 
 
Second, even if physical availability can be assured, the cost at which energy can be obtained by end users can be very expensive, making the use of energy either uneconomical (for businesses that cannot pass on increasing costs to end users) or adding an undue burden on the cost of living, eroding living conditions, causing poverty and social unrest which, in the end, might bring about political changes both locally and on a large scale.  For example, because of the Russian aggression against Ukraine, the Western world is moving away from purchasing and using Russian hydrocarbons. The resultant sharp increases in market gas prices through 2022 have caused many energy-intensive businesses across Europe to fail or to temporarily scale down production, as has already happened to the fertilizer industry.
               
Because of complex value and supply chains linking geographically remote points of production and delivery of energy to the end user in requisite form and at acceptable cost, the entire global energy system is subjected to forces that themselves are the product of many geopolitical vectors.  Notably, the situation in Ukraine has not only negatively affected the energy security and energy supply in many countries, especially in Europe, it may also cause profound ripple effects in the entire world.

One of the victims of rising energy prices is the fertilizer industry. The concentrated production of fertilizers and its increase in prices will eventually affect food production around the world. In the short term, this will lead to possible food shortages.  Add to this the limited number of crop exports from Ukraine (before the war Ukraine was the world’s major producer of foodstuffs) which could have far-reaching effects in poor countries that rely on cheap imports. 

Bleak future?

What seems to be a local event might easily have global consequences and energy, being the equivalent of the pulsating human blood stream, is the means that can spread and exacerbate negative consequences around the globe.

Pawel Kowalewski

Practice Leader Power & Renewables Division

T +48 507 085 066

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Sustainability Reporting – is it Fact or Fake?

Sustainability Reporting - Fact or Fake

In recent years, companies have increasingly been publishing ESG reports and providing interested readers with insights into their strategies, objectives and measures. If one compares such reports, it is noticeable that there is no uniform procedure for preparing the report and there is often no information on the data basis and the standards applied.

Thus, some readers of such reports probably also ask themselves whether there are any regulations for this or whether the data have been checked in any way.

Status quo in recent years

In Austria, for example, only large corporations are currently required to publish a non-financial statement in the management report. The requirements for the content (regulated in the so-called NaDiVeG) are very general and include, in addition to a general description of business activities, the topics of the environment, social issues, employee concerns, respect for human rights and the fight against corruption. The most important non-financial performance indicators have to be reported. The Supervisory Board and the members of the Board of Management are responsible for reviewing this data; the auditor merely confirms the existence of the report. For the type of data determination and the scope of reporting, reference is made to various frameworks, such as the GRI (Global Reporting Initiative), but there is no obligation to apply them.
 
Another type of report are the so-called environmental statements. These are prepared by companies that participate in the EU’s voluntary EMAS (Eco Management and Audit Scheme) system. These reports usually focus on the topic of environmental protection and are checked and verified by so-called environmental auditors according to specified procedures and contents.
 
Some companies also publish information on their greenhouse gas emissions, e.g., related to the product or the site. This data is often – though not always – verified by independent third parties. This can be recognized by the reader of this information by the fact that there is an “assurance statement” in the report in which the verifier confirms that the data has been determined in accordance with a standard (e.g., ISO 14064) as well as correctly.

Uniform EU regulation from 2024

The new EU Corporate Sustainability Reporting Directive (CSRD) will set new standards in the European Union from 2024. Not only will the scope of application be gradually extended from large corporations to small companies, but also.

  • the scope of the report is specified in more detail,
  • a uniform digital reporting format is introduced, and
  • an obligation to have the reports audited by external third parties.

Standards for the type of data to be reported and the collection are also to be defined by the EU in the course of 2023.

Conclusion

Not all sustainability reports are the same – source information and audit status are currently not easy to identify, there is a lack of uniform regulations – there are therefore major qualitative differences in terms of professionalism and orientation. More transparency can be expected in the future.
 
GREG’s experts will be happy to support you in designing and optimising your sustainability report and the associated data management.

Sabine Bradac

Sabine Bradac

Risk Consultant GrECo Risk Engineering

T +43 50404 896

Johannes Vogl

General Manager GrECo Risk Engineering

T +43 664 883 805 04

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The New Focus on Talent

focus on talents

Digital transformation, demographic change, increasing complexity and a global virus are leading to a continuous process of change. For those responsible for Human Resources, this situation brings new opportunities and challenges.

The need for highly qualified employees is growing. Aging teams in digitized work environments are increasingly creating skills gaps. Recruiters are no longer required to select ideal candidates for filling critical positions from a flood of applications. Those times are in the past. The tide has turned, the recruitment processes are more about arousing the applicants’ interest in the company with the help of employer branding activities.

Talent Identification and Management

The magic word is talent. But how do companies succeed in attracting talent? 

Let’s start with the meaning of the word. The term talent can be represented in different ways. What is undisputed is certainly the expectation of talented people to make a valuable contribution to the company’s success. Talents are mostly associated with people outside the company. 

But what about those talents who are already part of the organization and whose potential is (still) undiscovered?
In the “War for Talent”, HR strategies are based on three key factors:

  • Recruitment
  • Education and Development
  • Retention

The relation between looking after current employees and attracting new talent shows what makes a company the workplace of choice, which key factors are necessary for this attractiveness, and how companies differ from the competition.

Learning and Development

Professional training and individual development, flexible career paths and a broader range of tasks are of great importance to the new generation of employees. Attractive employers, therefore, offer a learning and development strategy that integrates learning into the workplace and draws individual learning and development paths.

We believe that GrECo is a great place for great people, where every employee has the chance to learn and work independently and bring in ideas. We developed a sophisticated internal learning and development programme, because we know that lifelong learning is a major factor for new generation of employees.

Learn more on our Careers page.

Employer Branding and New Work Culture

More and more applicants are screening potential employers for their commitment to climate protection, diversity and inclusion, ethical decision-making, and sustainable finance. Generations X, Y and Z in particular, are looking for ways to contribute to change with their work and are increasingly opting for companies that live their Environmental Social Governance (ESG) responsibility and present it transparently.

A realignment of the corporate DNA is therefore based on social responsibility and the creation of sustainable and secure jobs. This requires a work culture that puts people first, even in the time of digital transformation.
The workplace of future needs basic conditions that create space for new things, promote a culture of mistakes and feedback and stimulate social exchange to enable innovation and creativity. Companies need to keep that promise they make in job interviews, on social media and in publications, and remain authentic in their stories.

Gabriele Andratschke

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T +43 664 962 39 18

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Insurance Against Terrorism & Political Violence

Insurance Against Terrorism & Political Violence

9/11, the Madrid train bombings, the attack at the Manchester Arena or the London Tube bombings: Modern-day terrorism has many faces and continues to evolve. Despite that, it was only after Russia invaded Ukraine that the demand for insurance against political risks and violence significantly increased.

Terrorist attacks, strikes, violent protests against social evils and other political unrests can cost lives and directly or indirectly impact businesses as well. While insurance policies cannot prevent human suffering, they can help companies offset material damages, facilitate reconstruction, and get back to business as usual. An insurance policy reduces financial losses incurred due to business interruptions, it minimizes rental losses or even a loss of reputation. 
 
However, the insurance possibilities against terrorism and political violence have not yet reached companies in Europe. These insurances are still regarded as providing niche coverage only, even though banks and investors increasingly ask for this coverage. Despite major international events, such as 9/11 or the terrorist attacks in large European cities, neither the demand nor prices have increased on international markets for protection against political risks. 
 
This changed gradually only a few days after Russian troops invaded Ukraine. The demand for Political Risk & Violence Coverage has increased. Companies now want to be on the safe side and are thus willing to accept higher costs for insurance premiums. At the same time, the war has caused the coverage market to shrink. The good news is: It has remained largely intact. 
 

Possible Risk Exposure

Critical infrastructure such as energy and communication are typical high-risk targets for terrorist attacks. Similarly, industrial plants, commercial properties, tourism or health facilities have also been targeted. With globally connected national economies, their supply and value chains as well as background infrastructure, the scope of possible damage has changed over the past decades. Unlike earlier on, the potential for major financial losses without material damage to companies has spiked. A “Non-Physical Damage Business Interruption“ (NPDBI) protects against financial losses due to terrorist attacks that happen in the vicinity of the company, yet cause no material damage at the company’s location.

Additionally, there is a risk of being held accountable and obligated to pay compensation for damages if safety and security measures are found inadequate for protecting the lives and property of others, such as employees. Special terrorism liability insurances safeguard companies against such potential liabilities.

Risk Transfer

Terrorism insurances are so-called “named perils”, providing coverage against known and named dangers. This also means that the insurance only provides coverage for the contractually agreed dangers or events that protect documented financial assets and gross profits. A risk analysis is thus a prerequisite to determine the coverage that best meets the company’s potential risks. Possible threat scenarios, their impact and potential for damage must be closely looked at.

The aim is to adequately safeguard the client against any impact in the event of damages. Our GrECo risk specialists develop tailored insurance solutions for their clients. In doing so, their task in providing such special concepts for coverage is to also define the limits of other, more conventional (all risk) material damage and business interruption insurances and avoid overlaps or insurable coverage gaps.

The Devil’s in the Details

It is impossible to insure clients against all potential risks or events. A world war is the major exclusion of insurance coverage, meaning that if war breaks out between at least two of the five global powers – USA, Russia, China, UK and France – insurance coverage shall not apply. Cyber terrorism is also excluded from this coverage.
The construction sector and construction project managers pay attention! Normally, construction policies do not protect against terrorism and political violence. Insurers do provide coverage against strikes, riots and civil commotion (SRCC clause) with sub-limits. This type of coverage is usually subject to a special right of termination on part of the insurer, a right that may be exercised at any time.

Zviadi Vardosanidze

Group Practice Leader Energy, Power and Mining

T +43 664 962 39 04

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For Erne Fittings, the world’s leading supplier of butt-weld fittings, “the safe connection” is more than just a slogan: Passion and perfectionism are put into its safe pipe fittings for permanent welds. Every safe connection is also a strong pillar of success in risk and supply chain management and a solid foundation that Erne relies on during today’s multiple crises.

What did we learn from supply chains? Single sourcing is dangerous because being heavily dependent on only one supplier does not enable companies to spread the supply risk. The Covid-19 pandemic has also demonstrated that the single-sourcing effect on supply chains can also be caused by a dependency on several suppliers from only one country.

In China, President Xi Jinping’s Zero-Covid approach brought a sudden halt to entire regions of this huge country. Nothing works anymore, no one leaves their home, nobody works or produces things, and no one exports or imports.

We’re all in the same boat

Container ship crews – mostly Asian – were no longer allowed to board or leave a vessel. Container ports came to a standstill, and the entire cycle of transporting and shipping goods was bogged down – until today.
Lockdowns which blocked the global economy ensued. As the restart did not take place simultaneously, the world economy struggled to restore its rhythm. Add to that the war, following Russia’s invasion of Ukraine. While Ukraine has become the main supplier of raw materials and intermediate goods for many industry sectors, the Western world saw itself forced to act by imposing sanctions on Russia.

Sanctions, not only harm Russia’s economy in the medium and long term but which negatively impact the energy supply chains of the Western world in the short term.

The day when Erne’s world stood still 

In March 2020, the world woke up to a pandemic. A scenario that caught virtually every country and every business unprepared and unaware – Erne Fittings was no exception.

Our customers supply products and services to pipeline engineering and construction companies, so-called EPC companies that are active in the energy industry all over the world, providing products needed to plan and erect ready-to-use plants. They focus on power plants in the oil, gas, nuclear, and district heating sector as well as on hydrogen plants, given the agenda for decarbonisation.

With the onset of the energy crisis and the plunging oil price almost all our clients brought their projects to a sudden halt. New projects in the pipeline were stopped as well or no longer pursued. Our suppliers were forced to either reduce their production or cease it altogether. The market came to a standstill overnight. The pandemic, however, also demonstrated that costs alone were not the only decision-making criteria for management. While laying off staff may have reduced staff costs in the short term, this decision would have been toxic as soon as operations were resumed. The same applies to supply chain management.

Even though today, three years later, multiple crises – a seemingly never-ending pandemic, a geopolitical apocalypse, the energy transition against the backdrop of the climate crisis – present an array of new challenges, Erne Fittings is on track and fit for the future with its strategic and enterprise risk management:

Erne is fit for the future

  • Our supply chain and procurement management is based on long-term and trustworthy partnerships. What matters most are sustainability aspects, quality, and delivery capabilities, not prices. The safe connection is an essential technical and an equally important human factor for our success. 
  • Procurement difficulties and the increasing cost pressure forced us to streamline our product portfolio. We optimised our entire supply chain and grasped new opportunities as we strongly believe that in the midst of every crisis lies great opportunity. We knew that the world would once again need pipe fittings and that we needed to be ready for this day, being leaner, more efficient, and more productive. Our plan worked. At Erne, we optimally positioned ourselves for our clients’ changed needs and behaviour patterns in turbulent times. Today, more than ever, we are both customer and supplier of choice.
  • We realised quickly that the high volatility in prices in our business sector changed the behaviour of our customers. While the quantities ordered are smaller, the order intervals have become shorter and more frequent. We adjusted our supply chain accordingly and optimised our production processes. Our state-of-the-art high-bay storage now plays an even bigger role. It enables us to ensure faster deliveries to our customers, despite all the adversities in procurement markets.
  • Today’s turbulent times have shown us once again just how important trust and sound relationships are for a well-oiled supply chain. In many cases, it was not the availability of materials that caused problems. Rising costs for both raw materials and energy led to higher purchase prices and in turn to higher levels of receivables while quantities either remained unchanged or were lowered. Credit insurances, however, could no longer provide adequate cover. It came down to a matter of trust – trust that all the goods that were ordered could be paid as well, even though the insurance only provided partial cover. Erne has built up this trust with suppliers and banking partners over the past 120 years. The sold trust basis paid off time and again during the crisis.
  • Our strategy to pursue a close proximity to customers in Eastern Saudi Arabia served Erne Fittings Middle East Co. Ltd as an effective instrument to manage the supply chain in this important market – reshoring from our customers’ point of view, if you like. Erne Fittings Middle East now manufactures and provides local customers with the entire product portfolio of carbon steel elbows. Aramco, the world’s largest oil producing company, honoured our colleagues’ efforts with the “LOCAL MANUFACTURERS QUALITY EXCELLENCE AWARD 2021“ – a wonderful acknowledgement bestowed upon Erne Fittings Middle East in February 2022.
  •  Erne is more than ready to tackle the energy transition. We are the first company to have received a TÜV Süd certification for our hydrogen-compatible fittings. The 100 percent hydrogen compatibility allows us to be a first mover in this sector as well and a reliable partner for our customers.
  •  A lot still needs to be done to make the energy transition work. The current crisis forces Western economies to rethink and reposition their energy policies. To be independent of oil and gas, we must quickly build new facilities, such as LNG terminals or gas pipelines. Our biggest risk, however, is the required interim supply of gas which we need to manufacture the products that will ensure our energy supply of the future.

Turbulent times require thorough planning and a carefully thought-out course of action. Securing raw materials and energy on the supply side for the long term, although customer demand indicates smaller volumes delivered faster in shorter cycles, is a business risk and a challenge for the entire supply chain. A mere mathematical calculation of the risk is in this case not good enough as all players in our market rely and depend on each other like never before. Longstanding, personal and trustworthy relationships have become an essential element of our risk management. The same applies to our customers, our suppliers as well as our partners, such as banks and insurance. What we cannot influence is the geopolitical risk and with it the level of uncertainty that we feel in the global economy. This has drastically increased over the last five years.

About Erne Fittings GmbH

Erne Fittings, founded in 1920 in Vorarlberg, Austria’s most Western province, is the world’s leading manufacturer of top-notch butt-weld fittings for the approved market, focusing on the energy industry. Erne Fittings employs about 350 people at its production facilities in Schlins, Mürzzuschlag (Austria) and Jubail (Saudi Arabia) and achieves an annual turnover of about EUR 70 million.

Bernd Klemisch

Member of the Executive Board and CFO
Erne Fittings GmbH

T+43 5524 501 102  

Related Insights

End of International Coverage for Russia / Belarus / Ukraine?

End of International Coverage for Russia / Belarus / Ukraine?

In the negotiations taking place on contract renewal, it has turned out that the international insurance industry is no longer willing to agree on coverage for Russia and Belarus, and the options for coverage in Ukraine are also very limited.

Since it began, the Russian aggression against Ukraine has led to numerous economic changes, the scope of which still cannot be fully assessed. Keywords such as energy crisis, inflation, stagflation or even recession dominate international reporting, lectures and discussions. The insurance industry’s core business was affected by the consequences of the war from the start. In the beginning, there was the withdrawal of “Western” reinsurers from the Russian market, followed by the self-isolation of the Russian insurance market and the interruption of cross-border payment flows due to the declaration of martial law in Ukraine.

Both markets – Belarus plays a subordinate role here given the low level of international trade and investments – were thus isolated, but insurance cover was still available locally, albeit with significantly reduced capacities, especially in Ukraine. It was therefore reassuring that international insurance programs were honoured during their remaining contract period in 2022 and coverage was provided for all three states involved in the war via the Financial Interest Clause of the master contract.

Territorial exclusion is an issue during insurance contract renewal

In the negotiations taking place on contract renewal, it has turned out that the international insurance industry is no longer willing to agree on coverage for Russia and Belarus, and the options for coverage in Ukraine are also very limited. It is, of course, the first time in decades that a war involving a major power is taking place that is being opposed and indirectly fought by other major powers, and this is probably the reason why insurers have not only focused on the exclusions of coverage briefly described below in connection with war and the imposition of sanctions but introduce a territorial exclusion for Russia, Belarus and Ukraine. This attitude is unique and must therefore be examined critically at this point. The exclusion clause, as also acknowledged by reinsurers, represents the last link in a three-part exclusion chain, a simple solution that avoids any discussion concerning a risk located in one of the countries.

Traditional: the War Exclusion Clause

Let us now take a closer look at this three-part set of exclusions.

The traditional precaution of the insurer against having to pay claims which would by frequency and amount destroy any insurance portfolio and might lead to a serious threat to the continued existence of the insurance company is the war exclusion anchored in the General Conditions, above all for property and liability insurance, although differently defined. In fire insurance (including business interruption!), the clause says that “damage caused by the direct or indirect effect of acts of war … including all acts of violence by states …” as well as “all military or official measures connected with the acts mentioned …” are not covered.

According to a newer definition, liability insurance does not provide insurance cover “for damage caused by acts of violence by states or against states and their bodies, acts of violence by political and terrorist organizations, …”. Both definitions are therefore very broad and general and will be checked by the insurer in the event of a claim in Ukraine and, if necessary, applied to decline payment of a claim. However, the burden of proof lies with the insurer – despite the contrary, contestable definition in property insurance that can sometimes be found. In any case, the insurer is protected against claims for war damage.

Sanctions prohibit insurance in certain areas

After the war broke out, the EU as well as the US and UK, responded with economic sanctions against Russia, specially designated Russian citizens and entities. The eight packages of sanctions of the EU now in existence are related to export and import restrictions for precisely named goods recorded in lists. Compliance with the sanctions is binding for legal and natural persons within the EU, disregarding them or circumventing the EU is a punishable offence. It follows that no insurance cover can be granted for sanctioned persons, organizations and goods, including their production, trade with them and transport.

In recent years – long before the war in Ukraine – insurers have therefore formulated sanctions clauses that exclude coverage for activities and goods subject to sanctions. The insurers’ exposure is thus further reduced since some sectors and products are now subject to sanctions for Russia. However, it must also be emphasized that the EU has expressly stated that there must be no product sanctions for food, sanitary articles, medicines and other products of humanitarian need. Although sanctions intend to affect the Russian economy, they should not contribute to punishing innocent citizens. It is therefore expected in the dialogue between insurance customers and insurers that the sanction clause will be checked for its specific applicability in individual cases when the insurance contract is concluded or in the case of a claim.

Territorial exclusion reduces the value of the International program

These two clauses, which are justified and allow an examination of the individual case and represent at least some protection of the insured if a claim is not due to war or in connection with sanctions, are now accompanied by territorial exclusion as a third clause. Its application means that the insurer no longer has to deal in any way with risks, contracts or claims in any of the countries concerned. It is therefore an a priori refusal of cover, which has only seldom been seen in this form up to now. It has not even been applied to the famous “rogue states”.

Insurance lawyers will object here that there is no obligation to contract in industrial insurance and that the insurance company can refuse to assume a risk at any time. The legal provisions on the increase in risk even suggest that an insurer does not have to assume a risk that it considers to be high. This is correct, but for reasons of fairness alone, an insurer who is willing to insure known risks worldwide as part of an international insurance program should not start excluding individual countries. If such an example catches on, it’s not far to the erosion of the insurance program, when other countries that are problematic for whatever reason, like China, Iran and whoever, are put on the exclusion list.

Another often-heard argument for this exclusion is compliance: it is not appropriate to continue to support the Russian economy and this also applies to insurance and reinsurance. As with other measures, however, the one who ultimately suffers is not the warring state of Russia, but the policyholder who has gone to the countries of Eastern Europe with his activities. He is now told that he can insure his risks locally, which is a very weak alternative given the limited capacities in Russia or the scarcity of insurance sums in Ukraine. Comparable to accepting a high degree of underinsurance.

Individual solutions required

Nevertheless, we are confident that in individual cases it will be possible to obtain coverage in the country of the master treaty when it comes to risks with a humanitarian context, when the risk locations are not directly in war-affected areas of Ukraine, when the volume of insurance in one of the states concerned is small compared to the rest of the world, when transports between third countries involving one of the three states have to be insured, etc. It is worthwhile to negotiate with the insurance industry on an individual basis, at least to arrive at a compromise solution, such as coverage with a review clause in the event of a clear escalation of the war.

Andreas Krebs

Andreas Krebs

Head of Insurance Mediation Services

T +43 5 0404 229

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Webinar “Cyber risks in Food & Agri industry”

Cyber risks in agriculture

In our recent webinar “Cyber risks in Food & Agri industry” we shared information about the role of cyber insurance, case study examples of claims handling and Security Operation Center (SOC) as a service.

The food and agriculture industry has adopted the use of smart technology, such as automated farming techniques or automated high-bay warehouses. In addition, the industry is highly dependent on automation to keep prices low and distribution running smoothly. With all the benefits of digitalization, it is important to address the cyber exposures that come with this technology reliance.

In our recent webinar “Cyber risks in Food & Agri industry” we shared information about the role of cyber insurance, case study examples of claims handling and Security Operation Center (SOC) as a service. With more than 70 internal and external participants, we dived into the topics of cyber risks in the food and agriculture industry with a desire to show the importance of proper cyber insurance solutions for clients in this industry.

Speakers included Stephan Eberlein, GrECo Group Practice Leader in Liability & Financial Lines, Rob Lloyd, Director ASL, and Alexandra Rusnakova, Cyber security analyst at AXENTA CyberSOC.

You can find the full webinar recording on our Youtube profile.

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Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211