"Russia Halts EU Gas Supply, Raising Concerns Over Production Disruptions in Korean Shipbuilding, Semiconductors, and Automobiles"

The Bank of Korea Checks Domestic Industry Risks

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jung] Concerns have been raised that if Russia's complete halt of natural gas supply to the European Union (EU) this winter and widespread production disruptions materialize, the South Korean economy could face not only macroeconomic risks such as a slowdown in exports to the EU but also industrial-level risks including energy supply instability and disruptions in the supply of key capital and intermediate goods.

On the 15th, the Bank of Korea (BOK) stated in its BOK Issue Note report titled "Review of EU Production Disruptions and Domestic Industry Risks Related to Russia's Gas Supply Suspension" that "Given the high dependence on energy imports and significant exposure to overseas supply chain shocks due to active participation in the global value chain (GVC), our economy is expected to face considerable risk factors."

According to an analysis using international input-output tables, a 1 percentage point decline in the EU's growth rate is estimated to reduce South Korea's exports to the EU by 1.24 percentage points and total exports by 0.19 percentage points.

The EU depends on natural gas for about 24% of its total energy consumption and imports 36% of its natural gas from Russia. From the 1st to the 12th of this month, Russia's average daily gas supply to the EU dropped to about 20% of last year's level. The International Monetary Fund (IMF) and others predict that if Russia halts gas supply, the EU's economic growth rate could decline by approximately 0.4 to 2.6 percentage points over the next year.

The domestic economy is also expected to be impacted. With South Korea's liquefied natural gas (LNG) inventory significantly below the average level of previous years, a combination of Russia's gas supply suspension and increased winter demand could intensify competition among countries to secure LNG, potentially destabilizing domestic energy supply.

Australia, a major LNG exporter, accounts for 21% of South Korea's LNG imports, but future import conditions remain uncertain as Australia is considering export restrictions. Rising natural gas import prices could worsen the profitability of related public enterprises and exert additional upward pressure on electricity and gas tariffs. Chemical products such as silicon, wafers, and fertilizers, which use natural gas as a raw material, would face increased production cost burdens.

Production disruptions are also a concern for South Korea's key export sectors such as shipbuilding, semiconductors, and automobiles. Some capital goods and intermediate goods, including semiconductor equipment and ship engines, have high EU dependency and are difficult to substitute.

Major domestic companies import all their core semiconductor manufacturing equipment (EUV) from the Dutch company ASML, which in turn exclusively sources optical components like lenses, essential for EUV, from Germany's Carl Zeiss. Therefore, supply disruptions in German components directly lead to production disruptions of EUV in the Netherlands.

Kim Nam-joo, Deputy Director of the Trend Analysis Team at the BOK's Research Department, explained, "Since semiconductor equipment imports significantly affect our economy's production capacity (facility investment), production disruptions in Europe could greatly constrain domestic facility investment."

In the automotive sector, production disruptions at German Infineon and Dutch NXP, the top one or two companies in vehicle semiconductors, could exacerbate global vehicle semiconductor supply imbalances, thereby restricting domestic automobile production.

For the chemical industry, further increases in the price of naphtha, a key raw material, would worsen profitability, while the steel industry would inevitably face increased cost burdens if electricity rates rise due to higher natural gas prices.

Considering South Korea's import scale and substitution possibilities, production disruptions in Germany among EU countries are expected to have the greatest impact on domestic industries.

Deputy Director Kim emphasized, "To prepare for the economic shock caused by Russia's gas supply suspension, efforts to stabilize energy supply must be strengthened," adding, "It is necessary to intensify proactive stockpiling, diversify import sources, and expand and share overseas supply chain information, especially focusing on import items that significantly affect our economy."

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