Aftermath of Russian Raw Material Shock... Government to Use Emergency Tariff Allocation Card (Comprehensive)

Korean Economy on Alert Amid Ukraine Crisis... Government Considers Expanding Tariff Quotas
Neon and Krypton Tariffs Likely Cut to 1-2%... Item List to Be Announced Soon
Rare Gas Prices for Semiconductors Surge... Already Twice Last Year's Average
Nickel and Aluminum Prices Soar... Account for 50% of Battery Costs

Researchers are conducting semiconductor material and component development research in the 12-inch semiconductor testbed cleanroom at the Daejeon Nano Convergence Technology Institute. Photo by Jinhyung Kang, Daejeon aymsdream@

[Asia Economy Sejong=Reporter Kim Hyewon, Sejong=Reporter Lee Junhyung] The government has pulled out the emergency tariff quota card to ease inflationary pressures caused by the Russia-Ukraine conflict. After selecting items with unstable supply and prices, such as rare gases essential for semiconductor processes?one of Korea's key industries?and international grains used as raw materials for other goods and services, it plans to impose either zero tariffs or tariffs lower than the standard rates.

According to related ministries on the 7th, the Ministry of Economy and Finance, Ministry of Trade, Industry and Energy, and Ministry of Agriculture, Food and Rural Affairs have decided to expand the application of tariff quotas, which have been used as a policy tool during past inflation surges, to all-around items and are conducting a full survey. They expect that the price shock triggered by geopolitical crises such as international oil prices surpassing $130 per barrel will directly affect the domestic market from late this month, and plan to select and announce the tariff quota items soon.

The representative items under review are neon and krypton, with a likely plan to reduce the current basic tariff rate from 5.5% to around 1-2%. A senior official from the Ministry of Economy and Finance said, "For key items like neon and krypton, which depend on Russia and Ukraine and whose supply shortages could harm the competitiveness of core industries, tariff quotas will be temporarily applied if supply conditions do not improve. Although the reduction rate is being determined, tariffs are taxes, so it is difficult to reduce them to zero percent." A senior official from the Ministry of Trade, Industry and Energy explained, "Since neon gas is also produced domestically, we are reviewing not only the reduction rate but also the quota limits considering the price gap with imports."

The government also adjusted tariff quotas seven times in one year during the peak of inflation caused by high oil prices and foot-and-mouth disease in 2011, increasing the number of target items to 116. This year, tariff quotas are applied to 90 regular items under the Customs Act, but with additional regulatory revisions, the number of applicable items is expected to exceed 100.

Supply Chain Crisis Tightening the Noose on Semiconductors and Batteries

"The Ukraine crisis has become the greatest risk to the global supply chain, surpassing the pandemic."

This is the diagnosis given by international credit rating agency Moody's regarding the Ukraine crisis. It means that the shockwaves caused by Russia's invasion of Ukraine are spreading across the global economy in all directions. Moody's sees that most industries are not free from the influence of the Ukraine crisis. Korea's situation, which focuses on manufacturing, is even more serious. Not only domestic key industries such as semiconductors, automobiles, petrochemicals, and steel but also future core industries like secondary batteries and electric vehicles are within the impact zone. We have conducted an in-depth check on the supply chain status of key raw materials affected by the Ukraine crisis.

Rare Gases for Semiconductors: Krypton, Neon, Xenon

The semiconductor industry was the first to become highly alert. This is because a significant portion of rare gases such as neon, krypton, and xenon (xenon), which are necessary for semiconductor photolithography and etching processes, depend on Russia and Ukraine. According to the Ministry of Trade, Industry and Energy, 28% of neon imported by Korea last year came from Russia (5%) and Ukraine (23%). The dependency on xenon (Russia 31.3%, Ukraine 17.8%) and krypton (Russia 17%, Ukraine 31%) was also high.

Domestic semiconductor companies such as Samsung Electronics reportedly secured 3 to 4 months' worth of rare gases. However, if the war prolongs, the problem will become serious. Although the semiconductor industry increased its rare gas stockpile to 3 to 4 times the usual amount before the Ukraine crisis to cope with supply disruptions, it is difficult to find alternatives after the war. In the case of neon, where Ukraine's production is overwhelmingly high, Russia, the United States, China, and France also produce it, but supply chain bottlenecks are intensifying, making it unlikely to secure the desired inventory.

Fortunately, POSCO and the specialty gas company TEMC recently succeeded in domestic production of neon gas. Full-scale mass production will begin in the second half of this year. However, production capacity accounts for only about 15% of domestic demand. TEMC is also promoting domestic production of krypton and xenon with POSCO, but the timing of mass production is uncertain.

Prices are already on the rise. The import price of neon gas reached $121,964 per ton in January this year, when tensions around Ukraine escalated, more than double the average price of $58,747 last year. Import prices of xenon and krypton also surged by 83% and 52%, respectively. In China, the spot price of neon increased by 65% compared to early this year.

Black Smoke Rises from Ukrainian Oil Depot Bombed by Russian Forces
(Chernihiv, Reuters=Yonhap News) On the 3rd (local time), black smoke is rising from an oil depot in Chernihiv, northern Ukraine, following a bombing by Russian forces. On the eighth day of the invasion, Russian troops continue to advance toward the capital Kyiv despite strong Ukrainian resistance and are concentrating attacks on the second-largest city, Kharkiv. [Provided by the Ukrainian State Emergency Service] 2022.3.3
sungok@yna.co.kr
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Key Materials for Secondary Batteries: Nickel and Aluminum

Prices of nickel and aluminum, which account for 50% of the manufacturing cost of secondary batteries, are soaring. Russia is the third-largest resource country in terms of production of both nickel and aluminum.

Nickel is a key material for cathode active materials that determine battery output. With the spread of electric vehicles, nickel prices have been steadily rising, and the Ukraine crisis has acted as a catalyst. According to the Korea Resources Information Service, the price of nickel was $28,800 per ton on the 3rd, a 39% increase from $20,730 on January 4th. Compared to three years ago ($13,160), it has more than doubled.

The price of aluminum, a key material for battery packs, reached an all-time high of $3,728.5 per ton as of the 3rd. Considering that aluminum was $2,815.5 per ton on January 4th this year, the price has risen by nearly $1,000 per ton in just two months.

The cost burden on the battery industry is inevitably increasing. Battery companies usually include clauses linking the prices of major cathode materials such as lithium and nickel to battery supply prices when signing supply contracts with automakers. However, aluminum is mostly excluded from such linkage clauses.

'Rice of Petrochemicals' Naphtha

Naphtha, the item Korea imported most from Russia last year, is also in an emergency. Known as the "rice of petrochemicals," naphtha is a basic raw material derived from crude oil refining and is used in the production of consumer goods such as rubber, fibers, and plastics. According to the Korea International Trade Association, Korea's imports of naphtha from Russia last year amounted to $4.383 billion, accounting for 25.3% of total imports from Russia.

The problem is that naphtha accounts for 70% of the cost of petrochemical products. This means that supply disruptions in naphtha could spread ripple effects to almost all consumer goods used in daily life. Due to the impact of the Ukraine crisis, naphtha prices surpassed $1,000 per ton for the first time in 14 years since 2008. On the 4th, naphtha futures prices were $1,078.39 per ton, a 48% increase compared to $728.33 on January 3rd this year.

The next step is a deterioration in profitability for the petrochemical industry. Companies with naphtha cracking facilities (NCC) such as LG Chem and Lotte Chemical face cost burdens proportional to naphtha prices.

[Image source=Yonhap News]

Essential Raw Material for Steelmaking: Ferrosilicon

Steelmakers are paying attention to ferrosilicon, which has about a 35% import dependency on Russia. Ferrosilicon is an alloy used in steelmaking to remove impurities or adjust molten iron composition. Ferrosilicon prices have already risen more than 50% compared to the same period last year. The industry expects further price increases due to the Ukraine crisis.

Some companies have started diversifying supply sources, considering alternatives from China, which produces 70% of the world's ferrosilicon. However, Chinese ferrosilicon is less price-competitive than Russian products. A steel industry official said, "Ferrosilicon is usually imported by container ships," adding, "Container shipping rates have risen since last year, increasing procurement costs."

This content was produced with the assistance of AI translation services.