[Editorial] Force majeure and chipflation: Multiple headwinds batter Korean industry

The Islamic Republic of Iran’s declaration of a long-term blockade of the Strait of Hormuz has raised serious concerns about the supply of Naphtha, the core raw material for the petrochemical industry. As it becomes harder for Korean companies to import Naphtha from the Middle East, some have already notified customers that they may have to invoke a "force majeure" clause, meaning they could be unable to fulfill product deliveries, while others are warning that such a step may become necessary.
Petrochemicals form a core foundation of the manufacturing sector. Petrochemical companies crack Naphtha to produce basic chemical products such as ethylene and propylene. These are then used by intermediate goods manufacturers to make a wide range of materials, including vinyl, plastics, rubber and textiles. If this production structure is disrupted, it is no exaggeration to say that the entire economy of a country can be hit. The current Naphtha supply crunch is therefore not an issue for a few firms, but a problem for the industrial sector as a whole.
Samsung Electronics, South Korea’s flagship company, is already on edge over "chipflation"—a sharp rise in semiconductor prices. Higher memory semiconductor prices have improved profitability at Samsung’s Device Solutions Division, but the Device eXperience Division (DX Division), which uses these chips in finished products, is now burdened with higher input costs. LG Electronics is facing similar pressure, with its raw material purchase costs rising by 1 trillion won last year compared with the previous year, signaling that cost inflation is spreading across the electronics industry.
Against this backdrop, Samsung Electronics’ television (TV), home appliance and smartphone businesses are reported to have gone into emergency management mode. The DX Division has ordered all business units to cut costs by 30 percent, and executives at vice president level and below are now required to fly Economy Class instead of business class on trips of less than 10 hours. Some business units are expected to find it difficult to avoid painful measures such as voluntary retirement programs.
Naphtha in the petrochemical sector and semiconductor chips in the information technology (IT) industry are both often called the "rice of industry." Any disruption in the supply of these key inputs, or a sudden spike in their prices, inevitably leads to higher production costs and weaker corporate profitability. This, in turn, can trigger reduced investment and employment, erode export competitiveness, and worsen the trade balance, potentially setting off a vicious cycle of slower growth. Given how heavily the Korean economy depends on manufacturing, a compound crisis in which supply instability and cost shocks occur simultaneously could sap vitality across industry and raise the risk of a severe downturn.
The Korea Institute for Industrial Economics & Trade (KIET) recently warned that if international oil prices break through 100 dollars per barrel, the petrochemical industry will be directly affected, while semiconductors—another mainstay of the Korean economy—will also suffer indirect shocks. It added that the aviation industry, the shipping industry and the logistics industry could be hit as fuel costs and dollar-denominated payment costs rise in tandem. There is growing concern over how deep a scar the war involving the United States of America, Israel and the Islamic Republic of Iran may leave on the Korean and global economies.
The Government of South Korea and the Democratic Party of Korea (DPK) are reportedly considering upgrading the Yeosu Petrochemical Industrial Complex, where petrochemical companies are clustered, to an "Industrial Crisis Special Response Zone." Emergency measures to cushion the immediate shock are necessary, but it is equally urgent to craft medium- to long-term strategies for the post-war period. In particular, the energy and raw material supply chains must be reviewed, and policy support and market-stabilizing steps are needed to prevent rising corporate costs from spreading across the industrial landscape. Above all, the government must stay in close communication with industry to reduce uncertainty and maintain a proactive and consistent response. Korea cannot determine the course of the war, but it can and must do everything possible—starting now—to prepare for and mitigate its economic fallout.