Russian invasion prompts search for alternative raw material sources

March 14, 2022

By: The Working Forest Staff

THE JAPAN NEWS — Manufacturers are starting to explore alternatives to Russia in sourcing their raw materials, as concerns about supply stability are growing due to the disruptions in production and logistics associated with the country’s invasion of Ukraine.

Material prices on international markets are rising, making it difficult for makers to switch suppliers.

■ Logistical disruptions

“If the situation drags out, the raw materials we used to purchase from Russia and Ukraine will need to be obtained through alternative avenues. We are preparing for that,” Nippon Steel Corp. Executive Vice President Shinichi Nakamura told reporters on Thursday after discussing the situation in Ukraine with officials of the Economy, Trade, and Industry Ministry.

Nippon Steel imports iron ore from both Russia and Ukraine, as well as coking coal from Russia. The two countries account for about 14% of the company’s total iron ore pellet imports.

For now, the company will continue production using existing inventory, but it plans to increase procurement from Australia, Brazil, and elsewhere if the fighting continues.

JFE Steel Corp. imports 18% of its coking coal from Russia and is considering alternative supply options such as Australia and Canada.

Russia and Ukraine together account for 5% of global steel production. Production and logistics have been disrupted by the invasion, which has increased supply concerns. Steel prices in Europe and Southeast Asia have soared.

Logistics have become snarled as marine shipping has stagnated since late February, for reasons such as suspensions of freight arriving at and departing from Russian ports.

Global shipping giants A.P. Moller-Maersk and MSC SA effectively stopped accepting orders to and from Russia on March 1.

Concerns about logistics disruptions have prompted the housing industry to explore alternatives to Russian lumber.

Open House Architect, which builds wooden houses, stopped importing Russian materials in early March. Even under the economic sanctions imposed by Japan, the United States and European nations, the company said it could still obtain lumber from Russia, but it decided not to do so because a protracted conflict could make it difficult to ensure a stable supply, according to a company spokesperson. Instead, the company is increasing purchases of domestic and Western products.

JK Holdings Co., a residential lumber wholesaler, said that the exclusion of major Russian banks from the SWIFT international payments systems could make it impossible to settle some purchases of Russian lumber and could delay procurement.

Sumitomo Forestry Co. imports some of the wood it uses for roofing and other purposes from Russia and said it will consider switching suppliers depending on the situation.

Russian lumber accounts for about 10% of the imported materials used in the domestic housing market. With international lumber prices soaring, some have complained of difficulty in finding materials from other regions.

Lumber futures prices at the Chicago Mercantile Exchange rose by about 15% in early March compared to late February, reaching their highest level this year.

“For some types of lumber, it is difficult to find replacements from other areas,” a senior executive at a major housing maker said.

■ High resource prices

Prices are rising dramatically for a wide range of resources, including rare metals. If the situation continues, it will undoubtedly affect a variety of manufacturers, such as automobile and electric appliance makers.

On the London Metal Exchange, the March 8 closing price of nickel — a major material in electric vehicle batteries — for three-month futures was twice what it was in late February. Futures for palladium, which is used in automotive exhaust purifiers, have increased by 22% on U.S. exchanges.

Russia is rich in natural resources, and speculative capital has flowed into the global market over concerns that supply from the country could drop or even stop, pushing up prices. Switching from Russia to other markets is costly.

“Unless we see a path to peace, resource prices will continue to be high. They may rise even further if the situation deteriorates,” said Satoru Yoshida of Rakuten Securities’ economic research institute.

Prof. Michiaki Tanaka of Rikkyo University said, “The rise in the price of crude oil has pushed up the prices of all kinds of things, and concerns about an economic downturn are growing.”

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