War threatens supply of vital materials to key industries

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War threatens supply of vital materials to key industries

A Russian pipe-laying ship on deployment for the construction of the Nord Stream 2 Baltic Sea pipeline is moored at the port of Mukran on the island of Ruegen, Germany, on Sept. 8, 2020. Germany has suspended the natural gas project with Russia in the wake of the war between Russia and Ukraine. [AP]

A Russian pipe-laying ship on deployment for the construction of the Nord Stream 2 Baltic Sea pipeline is moored at the port of Mukran on the island of Ruegen, Germany, on Sept. 8, 2020. Germany has suspended the natural gas project with Russia in the wake of the war between Russia and Ukraine. [AP]

 
The supply of key materials from Ukraine and Russia could get cut off or reduced during the war between the two countries, affecting semiconductor and battery manufacturing in Korea.
 
Samsung Electronics and SK hynix and their suppliers and smaller chipmakers are particularly vulnerable.  
 
Ukraine is a leading exporter of neon gas, which in purified form is used to etch circuit designs into silicon wafers to create chips. The eastern European country accounted for 23 percent of neon gas imported into Korea last year, according to the Korea International Trade Association (KITA), while it delivers 70 percent of the world's supply, according to market tracker TrendForce.
 
 
Korea imports a similar amount of other noble gases used in the semiconductor manufacturing from Ukraine and Russia, including xenon and krypton.  
 
"The war could constrain the supply of noble gases used in the manufacturing of chips with a relatively high reliance on Ukraine and Russia," according to a report released by KITA last week.  
 
The possible crunch comes as industry still grapples with pandemic-related shortages of chips and electronic components.  
 
"A supply crunch of neon gas could seriously put a strain on the production capacity of chips," said Park Kang-ho, an analyst at Daishin Securities.  
 
"Memory chipmakers have six to seven weeks of inventory stockpiled, higher than the normal four weeks, which is a positive," the analyst said, "Still, if the military action lasts for a prolonged period of time and the flow of raw materials is disrupted, it could have a serious impact on chip supply."
 
Manufacturers downplay the shortages.    
 
"Top-tier chipmakers like Samsung and SK hynix have already diversified the sourcing of noble gases in the wake of the conflict," one industry source insisted. "Since the two countries are not the exclusive suppliers of the materials, the chipmakers will be able to source them from alternative sources like China. But it is inevitable for smaller chipmakers to be affected."
 
Battery makers will likely face rising costs for nickel and aluminum, materials essential in making the most commonly used types of EV batteries.  
 
With Russia supplying 6 percent of the world's aluminum and 7 percent of its nickel, the prices of those materials have already spiked since the beginning of the conflict, along with other commodities.  
 
"Since November 2021, when a large contingent of Russian troops first gathered at Ukraine's border, the price of iron ore has jumped 50.5 percent, and that of hot rolled steel has increased 6.2 percent," said Will Byun, an analyst at NH Investment & Securities. "Over the same period, price increases for industrial metals have come in at 23.6 percent for aluminum, 23.4 percent for nickel, and 19.2 percent for cobalt."  
 
A source with knowledge of the raw material supply for local battery makers said that the higher costs won't likely affect major producers like LG Energy Solution and Samsung SDI.  
 
"Since the upward trend in raw material prices started last year, Korean battery makers already made long-term contracts for important materials," the source said. "So, the recent rise won't turn into higher costs for them, but if the trend continues for a longer period, they could be impacted without doubt."  
 
Russia's attack on Ukraine is both positive and negative for shipbuilders. European countries now have to turn toward more distant nations or alternative sources for the commodities they used to import from Russia. Germany, for instance, plans to build two liquefied natural gas (LNG) terminals, a project that could benefit shipbuilders making LNG carriers.  
 
Surging oil and gas prices as a consequence of the geopolitical uncertainties will also drive demand for offshore plants, according to Han Young-soo, an analyst at Samsung Securities.  
 
Still, the analyst pointed out that the conflict could also reduce the number of new orders.
 
"When uncertainties reached its peak, clients tend to delay making new orders for carriers until the murk clears. We need to take this into account at this point," Han said.  
 
Shares of Korea Shipbuilding & Offshore Engineering rose 0.92 percent to close at 88,200 won, while Daewoo Shipbuilding & Marine Engineering gained 2.71 percent to 26,500 won.  

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]
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