Korea’s supply chain risks resurface over Ukraine fears
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 geopolitical crisis involving Ukraine may threaten the supply chain for the country’s key exports, such as semiconductors, batteries and auto.
According to industry sources Wednesday, the prices of aluminum and nickel -- key minerals for electric vehicle batteries -- hit 14- and 11-year highs, respectively, as the United States prepares sanctions against Russia for invading Ukraine. As 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 its 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 Tuesday, the highest figure seen 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 are likely to take a heavy toll on Korean carmakers as well.
Hyundai Motor Group has since 2010 been running a manufacturing plant in St. Petersburg, Russia, 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 the Tucson, Palisade and Kia Sportage. Mass production was slated to start this year for exports to European and North American markets.
But if the situation worsens, the 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, Hyundai and Kia sold 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 possible supply chain risks, as it has been getting auto parts supplies from Ukraine and neighboring regions. Although it stopped direct auto exports to Russia in 2014 and to Ukraine in 2017, its contracted companies have been supplying SsangYong with raw materials like aluminum from Ukraine and auto parts for assembly from Slovakia. The closure of borders would 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 could reduce by 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, from the previous year.
Meanwhile, the Trade Ministry on Tuesday said it promptly set up a “Russian desk” to closely monitor a spike in energy prices as well as to take steps to manage supply chain risks. Authorities said they will also monitor critical raw materials that could prove vulnerable.
By Kim Da-sol (firstname.lastname@example.org) and Kim Byung-wook (email@example.com)