The Competitiveness of Korea’s Fine Chemicals Industry

The COVID-19 pandemic, the simmering trade conflict between the US and China, and the ongoing war between Russia and Ukraine have caused significant disruptions in the supply of critical raw materials (CRM), which are key inputs in the fine chemicals industry, and for which there are few viable substitutes. This reliance exposes the industry to potentially catastrophic geopolitical and environmental risks. The increasingly fragmented global supply chain in major economies exacerbates the risk of shortages and price volatility, and this is particularly true for CRM imported from China and a handful of other countries. Restrictions on CRM trade can lead to shortages and price increases, directly affecting production costs. And due to China’s dominance in the CRM supply chains, alternative sources are often more expensive, further diminishing profitability in this industry. Moreover, supply disruptions and delays complicate inventory management and demand forecasting, exposing companies to overstocking and stockout risks; prolonged inventory storage also accelerates depreciation. And while diversifying sources of CRM can stabilize supply, it also makes quality control and compliance more difficult and costlier. This poses a special challenge to the fine chemicals industry, where uniform quality standards are of utmost importance, given that most fine chemicals are high-performance products subject to stringent environmental oversight. In this paper, I assess the current state of competitiveness of South Korea’s fine chemicals industry in light of the risks described above, using a SWOT analysis based on the results of a survey of industry experts. I also identify some key implications for policy based on the results of the analysis.