How big is the impact of the Russian-Ukrainian crisis on the automobile industry? The Japanese automaker "made an account"

What is the cost of global supply chain disruption under the Russian-Ukrainian crisis? For Toyota, the figure is about $520-the world's largest carmaker's estimate of an increase in production costs per car!

The recent conflict between Russia and Ukraine has thrown the supply chain into chaos, which has led to a sharp rise in the price of raw materials. And if the above figure is multiplied by the 10 million cars planned to be produced this year, it will undoubtedly be a huge blow to Toyota.

Compared with the previous fiscal year, seven Japanese passenger car manufacturers will face an increase in raw material costs of about 1.4 trillion yen ($11.5 billion) in the year to March, said Seiji Sugiura, an analyst at Tokyo Research Institute in Tokai.

Companies such as Toyota and Nissan have struggled recently to increase production because of global chip shortages and a super-strong earthquake in northeastern Japan in mid-March, he said. Carmakers are expected to absorb some of the rise in raw material costs by cutting costs, but it is clearly difficult to absorb all the increases.

What is even more distressing for these Japanese carmakers is that the current crisis is not limited to the rising cost of raw materials. It has even hit the "lifeline" of the global auto industry: an ultra-efficient "just-in-time" procurement system that could have ensured that when needed, the 30,000 parts needed to assemble a passenger car can be put in place without even a minute's advance.

"in the past, as long as you place an order, the premise that parts will be delivered immediately is disintegrating," warned Sanshiro Fukao, a senior researcher at Itochu Research Institute.

Previously, the core shortage crisis that occurred at the end of 2020 has made companies question whether they need to start to increase semiconductor inventory in order to break the just-in-time production model. With the outbreak of the conflict between Russia and Ukraine and the intensification of sanctions against Western Russia, people's attention is now more focused on metals.

Palladium, nickel and aluminum are all "urgent"

The prices of palladium, nickel and aluminium have all soared to record highs this month. Palladium is used in automotive catalytic converters, nickel is used in electric vehicle batteries, and aluminum is used in automotive parts.

About 40% of the world's palladium is produced in Russia, especially Norilsk Nickel, a Russian mining giant. South Africa accounts for another 40% of production, with the rest from Canada, the United States and Zimbabwe. The automotive industry's demand for catalysts accounts for more than 80% of global palladium demand.

As it becomes increasingly difficult to buy palladium from Russian exporters facing sanctions, many buyers are looking for alternative sources. Hiroo Suzaki, president of South African metal producer Impala Platinum (Impala Platinum Japan), said he had responded to a large number of inquiries about palladium.

However, Suzaki has also given buyers a "shot": "the loss of Russian supply will have a significant impact on the palladium market. Carmakers and other buyers usually sign off-take agreements every year, so it is difficult to suddenly increase production to meet the needs of new customers."

If you continue to buy goods from Russia, buyers may face the risk of reputation damage. A metals trader in Tokyo said the company usually buys palladium from Russia but is "carefully assessing the situation" and negotiating with banks to see how sanctions will affect procurement and whether they will target palladium.

"our concerns are growing, especially after we see Shell being severely criticised," the trader added, referring to western criticism of the UK energy company's continued buying of oil from Russia in the early stages of the conflict.

The overall trend in the automotive industry is also exacerbating the current urgent situation in the palladium sector. Ironically, despite recent price increases, palladium production is unlikely to increase significantly because the auto industry is already abandoning palladium, said Mikio Fujita, a senior market analyst at Johnson Matthey. "demand for palladium catalysts is expected to shrink in the long run as the automotive industry shifts to electric vehicles," Fujita said.

The case of nickel is different. Russia's Norilsk Nickel (Norilsk Nickel) is the world's fifth-largest nickel producer, accounting for about 6 per cent of global production, according to Wood Mackenzie. About half of that production goes to European customers, and most of the rest goes to China. Demand for nickel is expected to grow sharply as sales of electric vehicles accelerate.

Now, nickel stocks are on the verge of drying up, with nickel stocks on the London Metal Exchange (LME) falling to about 73000 tonnes from about 260000 tonnes a year ago, equivalent to only about a month of global demand.

A nickel trader at a Japanese trading company said his European counterparts and buyers had begun to buy less nickel from Russia. "this has tightened the market even more and the premium in Europe has soared to record levels," the trader said. " The premium is the difference between the price paid by the buyer for the metal and the global reference price. Buyers and sellers usually negotiate quarterly to determine a premium or discount according to market conditions.

At the same time, the surge in aluminium prices reflects buyers' fears of a repeat of 2018, when the US imposed sanctions on Rusal, Russia's main aluminium supplier. Russia is the world's second-largest producer of aluminium, accounting for 5 per cent of global aluminium production.

"these metals are not as important as oil, so they are more likely to face supply risks or be targeted by sanctions," said Takayuki Honma, chief economist at (Sumitomo Corporation Global Research) for Sumitomo Global Research.

The increase in car prices has become the trend of the times.

Even before the conflict between Russia and Ukraine, some Japanese automakers warned that rising raw material prices were affecting their finances. Toyota said on Feb. 9 that the increase in such costs had a negative impact of 630 billion yen in the fiscal year ending in March, while Nissan said the day before that, the rise in the price of key raw materials had a negative impact of 81 billion yen in the nine months to December.

In any case, for consumers, this may mean that their car prices may be higher in the future. In March, Tesla raised prices in China and the US twice in less than a week because of surging raw materials and logistics costs. Now, the wave of price increases is likely to spread to Japanese car companies.

Honda said in February that it expected costs to increase by 290 billion yen this fiscal year because of soaring raw material prices. "We usually try to absorb costs by cutting costs internally, but now the increase is too big to absorb at all," said Takeuchi, Honda's chief financial officer. He said the company plans to raise car prices in North America. If necessary, similar actions in the Japanese market may be considered.

Foreign carmakers in Japan have already taken the move, and Volkswagen and Audi have now said they will raise the price of their cars in Japan by about 2 per cent from April. Given Japan's long history of low inflation and fierce price competition, it would be significant for domestic car companies to follow suit.

It is worth mentioning that the supply chain crises such as the conflict between Russia and Ukraine, the chip shortage and the novel coronavirus epidemic all took place in the critical period of the transformation of the automobile industry, which further aggravated the test faced by Japanese car companies.

"the shift to electric vehicles has brought new market competitors, which means the balance of power between suppliers and traditional carmakers is changing," said Sanshiro Fukao of Itochu Co., Ltd. [traditional] carmakers are no longer the primary customers of suppliers. "

These new market competitors do not always follow the same procurement rules as their predecessors. Tesla, for example, has been trying to ensure the supply of key raw materials for electric vehicles in the future. In 2021, the American company signed a three-year supply contract with Ganfeng Lithium, a Chinese battery-grade lithium producer. In the same year, the company also signed a four-year supply agreement with Australia's Syrah Resources for graphite anode materials.

Japanese carmakers are also looking for any solution they can find. The Nissan-Renault-Mitsubishi alliance has said that reducing raw material costs is an "ongoing process" and that key materials such as nickel and lithium will be shared within the alliance. Other companies are investing more in research to find alternatives to raw materials that are difficult to obtain or carry other risks, such as cobalt.

Naohiro Niimura, a partner at Market Risk Advisory, a Japanese commodities consultancy, says Japanese carmakers need to make more fundamental changes in strategy. "the premise of a just-in-time system is that automakers can purchase the necessary materials at any time and anywhere," Niimura said. But in fact, this is just to let their suppliers bear the procurement risk, while they do not manage the risk. "