Hormuz Stop Could Have Knock-on Effect on South Korean Shipbuilding

South Korean shipbuilders need ethylene, which is produced from imported naphtha, for steel cutting

South Korea is reporting that one of the knock-on effects of the stoppage of energy exports from the Middle East is threatening parts of its shipbuilding industry. The government has been working to clarify the extent of the problem while also supporting efforts to find alternative sources of naphtha, a refined crude oil product.

The imported naphtha is cracked at South Korea’s petrochemical plants to produce ethylene. While only accounting for a small portion of the market, Business Korea reports ethylene is critical to the shipbuilders, which use it to cut steel plates. Industry sources told the news outlet that without the chemical, it will be impossible for the shipbuilders to continue cutting steel.

The concerns began to intensify when South Korea’s largest petrochemical company, Yeochun NCC, declared “Force Majeure.” It said the problem was the supply of raw materials, and since then, at least three other leading producers, Lotte Chemical, LG Chem, and Hanwha Solutions, have also warned of potential supply problems.

South Korea’s Ministry of Trade, Industry and Energy held an emergency meeting on March 13 and launched an investigation to assess the short-term ethylene requirements and the amounts still on hand. The Ministry also organized a meeting between the shipbuilders and the chemical companies to plan shorter-term supply volumes.

The Ministry reported today, March 18, that its concerns have weakened but that it was continuing to work to ensure there would not be disruptions in the supply of the critical chemicals. A refined product, naphtha is also used in the production of propylene and high-grade gasoline, as well as an industrial solvent, dry cleaning agent, and cleaning solvent.

South Korea reports it is supporting the chemical companies’ efforts to secure alternative sources. It is contacting its overseas diplomatic missions and trade centers to secure alternate import supplies of naphtha.

The Deputy Prime Minister and Minister of Economy and Finance, Koo Yoon-chul, released a statement saying the government was also temporarily designating naphtha an “economic security item.” He also said they would be proactive in securing alternative import sources. Further, the government is placing export restrictions.

The potential disruption would come at a time when the shipbuilding industry is operating at a high capacity and working to stay ahead of competition from China. The yards have fully booked their building slots for years to come, and any delay in steel supplies could have a cascading effect on deliveries.