Middle East turmoil exposes Korea’s supply chain risks

As military clashes between the United States, Israel and Iran drag on, the fallout is spreading beyond disruptions to Middle Eastern crude oil supplies and into South Korea’s key industries. The country relies heavily on Middle Eastern nations for critical materials, including gases used in semiconductor manufacturing, ammonia for fertilizer production and petrochemical feedstocks. If surging global oil prices are compounded by disruptions in major industries such as semiconductors, the impact could weigh on South Korea’s economic growth, which is projected at 2 percent this year.

For semiconductor companies such as Samsung Electronics and SK hynix, the most immediate concern tied to the Middle East crisis is the supply of gases essential to chip production. Helium gas is used to cool semiconductor wafers, and about 65 percent of South Korea’s imports last year came from a liquefied natural gas plant in Qatar located inside the Strait of Hormuz. The facility recently halted operations after being hit by Iranian attacks. Meanwhile, 98 percent of bromine gas imports used in semiconductor etching depend on Israel, one of the parties to the conflict. Although companies have stockpiles, those reserves are unlikely to last for an extended period.

Agriculture is also facing a serious challenge. The main exporters of ammonia, the key ingredient in nitrogen fertilizer, and sulfur, a raw material for phosphate fertilizers, are largely Middle Eastern countries such as Qatar, Saudi Arabia, the United Arab Emirates, Iran and Oman. These materials are produced as byproducts during the refining and processing of liquefied natural gas and crude oil. About 35 percent of global urea exports and 45 percent of sulfur exports pass through the Strait of Hormuz. Less than a week after the waterway was effectively closed, international fertilizer prices have already surged due to supply shortages. The disruption is expected to affect global food production, including in South Korea.

The blockade has also halted imports of naphtha, often called the “rice of petrochemicals,” and domestic stockpiles in South Korea are expected to be depleted within about two weeks. Yeochun NCC, the country’s largest ethylene production facility using naphtha as feedstock, reportedly informed its clients last week that it may be unable to supply products due to force majeure circumstances. If the blockade continues, domestic supplies of chemical products such as plastics and synthetic fibers could face disruptions.

South Korea’s economy could suffer a significant shock if memory semiconductors, which have largely driven the country’s exports, experience production setbacks due to raw material shortages. Global oil prices have already surged past $90 per barrel, and if fertilizer shortages trigger sharp increases in food prices both domestically and internationally, the risk of stagflation, a combination of economic slowdown and rising inflation, will grow. The government and related companies should prepare for a prolonged Middle East crisis and even the possible destruction of raw material production facilities. They must move quickly to secure second and third supply lines while also exploring the feasibility of alternative production within South Korea.