The Korea Herald


Korea’s supply chain risks resurface over Ukraine crisis

Companies fear another possible disruption in resource imports for batteries, chips, auto parts and petrochemical production -- backbone of the manufacturing-dependent economy

By Kim Da-sol

Published : Feb. 23, 2022 - 15:20

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Hyundai Motor Group’s Russian plant in St. Petersburg. (Hyundai Motor Group Youtube) Hyundai Motor Group’s Russian plant in St. Petersburg. (Hyundai Motor Group Youtube)
South Korean companies are closely monitoring the situation as Western sanctions on Russia over the Russia-Ukraine geopolitical crisis may threaten the supply chains of the country’s key exports such as semiconductors, batteries and automotives. 

According to industry sources Wednesday, the prices of aluminum and nickel -- key minerals for EV batteries -- hit all-time highs in 14 years and 11 years, respectively, as the United States prepares sanctions against Russia for invading Ukraine. Since Russia is the world’s third-largest producer of nickel and aluminum, potential US sanctions would inevitably drive up the prices of those minerals. 

“A war is different from any other risk. It not only drives up the prices of raw materials, but also limits or halts the imports and supplies of those materials,” an industry official said. 

“Should the crisis deteriorate, battery production might stop and trigger a second ‘auto chip shortage crisis.’” 

Semiconductors are also expected to suffer collateral damage from the Ukraine crisis. Ukraine is a major producer of rare gases essential for chips such as neon, argon, krypton and xenon. In particular, Ukraine produces almost 70 percent of the world’s neon gas.

As Korea imports 23 percent of neon, 30.7 percent of krypton and 17.8 percent of xenon from Ukraine, the crisis can potentially push up their prices and cause complications in their supply chains. 

Oil prices are rising fast as well, reaching $96 per barrel on Tuesday, the highest figure in seven years. A recent Korea Energy Economics Institute report noted that oil prices could soar as high as $150 per barrel, as Russia tightens its flow of natural gas to Europe as leverage.

“Russia accounts for 12.6 percent and 16.6 percent of the world’s oil and natural gas production. Due to the crisis, the prices will stay strong for the moment,” said Hwang Kyo-won, an analyst at Yuanta Securities.

Geopolitical tensions between Russia and Ukraine is likely to take a heavy toll on Korean carmakers as well.

Hyundai Motor Group has been running a manufacturing plant in St. Petersburg, Russia since 2010, which is responsible for building some 230,000 units of cars annually. In 2020, the Korean carmaker bought GM’s manufacturing plant there to renovate the production line for mass production of its flagship SUV models like Tuscon, Palisade and Kia Sportage. The mass production was slated to start this year, for export to Europe and North American markets.

But if the situation worsens, such renovation plans may be scrapped.
Although Hyundai’s Russian plants are located far from the conflict area, disruption of its supply chain will not just be a possible scenario with the US and European Union’s economic sanctions on Russia, according to experts. 

According to the Association of European Businesses (AEB), Hyundai and Kia sold a total 373,132 cars in Russia last year. The Russian automotive market is the world’s 12th and Europe’s fifth in terms of size.

“We have been closely monitoring the situation as the Russian-Ukraine crisis is expected to bring about an economic slump and weak ruble,” said an official from Hyundai Motor Group. 

SsangYong Motor is also fretting over a possible supply chain risk, as it has been getting auto parts supplies from Ukraine and neighboring regions. 

Although it has stopped direct exporting of automotives to Russia in 2014 and to Ukraine in 2017, its contracted companies have been supplying SsangYong with raw materials like aluminium from Ukraine and auto parts for assembly from Slovakia. Closure of borders will impact SsangYong’s assembling of its vehicles. 

Auto parts firms are also concerned. Hankook Tire’s European holding, which runs a sales office in Ukraine, has asked all Korean employees to evacuate the country. 

The Korea Automobile Manufacturers Association said that if tensions between Russia and Ukraine escalate into a full scale conflict, automotive sales will reduce up to 29 percent, with a critical amount of supply expected to fall. 

In 2014, when Russia invaded and subsequently annexed the Crimean Peninsula from Ukraine, Western powers’ economic sanctions on Russia impacted the Korean economy. Korea saw as much as a 62 percent fall in its automotive exports in the following year. In the same year, the export of televisions and tires also dropped by 55 percent and 56 percent, respectively, compared to the previous year.

Meanwhile, the Trade Ministry on Tuesday said it has promptly set up a so-called Russian desk to closely monitor a spike in energy prices as well as to take steps to manage the supply chain risk. Authorities said they will also monitor critical raw materials that could be vulnerable.

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