Resource-rich Russia’s likely retaliation puts Japan’s manufacturing industry on alert

Courtesy of Tanaka Kikinzoku Kogyo K.K.
Palladium is used in some of these exhaust gas purification catalysts.

With Japan announcing additional sanctions on Russia over its invasion of Ukraine, Tokyo is on the alert for retaliatory measures from Moscow, especially those that may hinder the procurement of rare metals.

Japan imports copious amounts of rare metals from Russia. Should the rare metal supply be disrupted, the manufacturing industry, struggling to recover from the effects of the pandemic, would suffer another major blow.

According to the Finance Ministry’s trade statistics, imports from Russia in 2021 totaled ¥1.54 trillion, with nonferrous metals being the second-largest import by value after liquefied natural gas.

Resource-rich Russia’s production of rare metals has been flourishing. It tops the world in the production of palladium, with more than 40% of the market share.

Japan secures about 40% of its total palladium imports from Russia, which also is No. 2 in the world in terms of its share of platinum and cobalt production.

Palladium is the catalyst used for catalytic converters in gasoline-powered vehicles, platinum is used in hard disks, and cobalt is used in battery components.

With tensions mounting in Ukraine, the prices of rare metals were soaring even before Russia’s invasion of its neighbor. Palladium prices have risen by about 20% on the London exchange since the beginning of this year.

On Friday, the Russian ambassador to Japan hinted at the possibility of his country taking some sort of retaliatory action against the Japanese government.

If Russia imposes a trade embargo on Japan, the United States and Europe, rare metal prices are likely to rise further, hindering the procurement of such materials for automobiles and other manufacturing industries.

Exploring alternatives

Japan’s manufacturing industry has been slow to recover production amid the pandemic. Although the global economy is on a recovery track, Japan’s industrial production index declined in December last year against the previous month.

The shortage of semiconductors and restrictions on the supply of components are hurting the economic recovery of the nation.

Envisaged delays in the procurement of rare metals from Russia may lead to a stagnation in the supply of parts, forcing manufacturers to reduce production.

“If the situation remains tense for a prolonged period of time, it can create a bottleneck in our businesses,” said an official at a major automobile manufacturer.

The government has also been on the alert, accelerating its inspection of the supply chain since early February. It is racing to grasp the current inventory situation and exploring the possibility of alternative procurement.

“Russia has a considerable amount of palladium,” said Daishiro Yamagiwa, minister in charge of economic revitalization, during a Friday press conference. “We will work with other countries that have a similar sense of value to us so that Japanese companies will not be negatively affected.”

Support for businesses

The impasse between Russia and Japan, the United States and Europe possibly will be a prolonged one. Although trade with Russia accounts for less than 2% of Japan’s total, the impact on Japanese companies will likely spread over time.

The government on Friday ordered wholly owned Nippon Export and Investment Insurance (NEXI) to proceed with the payment of insurance claims as soon as possible.

NEXI offers trade insurance, which covers losses incurred by companies when overseas transactions are affected by factors such as war. The government intends to provide redress for companies whose transactions have been affected by the Russian invasion of Ukraine.

The government’s Japan Finance Corporation will also ease the requirements for safety net loans for small and medium-size enterprises to prevent cash crunches for businesses that might be affected by the Ukraine invasion and high oil prices.