Refiners Cut Output, Car Production Halted as Crises Batter Korean Industry

A cascade of geopolitical crises and major industrial accidents — including the Iran war and a fire at an auto parts factory in Daejeon — is throwing corporate supply chains into turmoil across South Korea. As so-called force majeure events pile up and external shocks rattle business operations, refiners are now joining petrochemical firms in cutting plant utilization rates. Airlines facing soaring fuel costs are scaling back routes one after another, and Hyundai Motor (005380.KS) Group has decided to temporarily halt production of the Ray and Morning models as a key auto parts supply chain teeters on the brink of collapse.

GS Caltex has recently reduced its daily crude oil refining volume from 800,000 barrels to 675,000 barrels, the refining industry said Tuesday. The company is also reviewing plans to further lower its refinery utilization rate.

Other refiners have either begun scheduled maintenance or are pushing up maintenance timelines. S-Oil has entered a previously scheduled maintenance period this month, shutting down one of three refining units at its Onsan plant. SK Energy and HD Hyundai Oilbank also have scheduled maintenance ahead.

HD Hyundai Oilbank and other remaining refiners are reportedly monitoring crude oil supply conditions and reviewing the need to adjust facility utilization rates. With crude procurement becoming increasingly difficult, the refining industry faces mounting pressure on profitability from the government's price ceiling and export controls imposed since March 13.

The decline in refiners' crude processing volumes is expected to directly affect the petrochemical industry as well. Naphtha and other feedstocks produced during the refining process are core raw materials for petrochemical companies, meaning reduced refining output will inevitably further squeeze petrochemical plant utilization.

A fire disaster at Anjeon Industry, an engine valve manufacturer in Daejeon, has also begun disrupting finished vehicle production. Donghee Auto, which produces small cars including Kia (000270.KS)'s Ray on a contract manufacturing basis, has decided to suspend operations at its Seosan plant from the afternoon of April 1 through April 11. The shutdown comes as engine supply has been cut off following the Anjeon Industry fire.

Donghee Auto, established in 2001, produces all of Kia's Morning and Ray small cars under contract. The Ray is considered one of Kia's steady sellers, with 48,654 units sold last year. Delivery currently takes seven months after order for the Ray and eight months for the Ray EV. The production halt is expected to extend wait times further.

Anjeon Industry is a key supplier that delivers engine valves to Hyundai Motor and Kia. The company is known to supply more than half of the engine valves used by Hyundai Motor and Kia. Donghee Auto receives automotive engines from Hyundai Wia, which has reportedly reduced its supply volume since the fire.

The aviation industry, facing a jet fuel shortage triggered by the Iran war, is canceling flights on Southeast and Northeast Asian routes. Air Premia has decided not to operate a total of 26 flights on the Incheon-Los Angeles route from April 20 through May 31, according to the airline industry.

China Southern Airlines has also decided to suspend some Incheon-Changchun flights from April 1 to 10. VietJet Air, a Vietnamese carrier, has made an emergency decision to halt operations on the Incheon-Phu Quoc route for the entire month of April.

Aero K announced plans to partially suspend operations on four international routes — Cheongju-Ibaraki, Cheongju-Narita, Cheongju-Clark, and Cheongju-Ulaanbaatar — from next month through June 23. T'way Air (091810.KS) announced it will raise excess baggage fees on international flights, excluding some routes, starting with departures on March 30.

Korean industry warns that continued supply chain disruptions from geopolitical crises and disasters could erode mid- to long-term competitiveness. The refining and petrochemical sectors, already caught in the crossfire of the Iran war, face inevitable profitability deterioration if the Middle East situation becomes prolonged.

The auto industry also faces a high likelihood of full-scale production disruptions centered on Hyundai Motor and Kia, given that Anjeon Industry had been producing 70 million engine valves annually. Hyundai Motor and Kia are inspecting engine valve inventories by vehicle model while searching for alternative suppliers.

"If an unexpected situation like the Iran war drags on, companies will have to redraw their business plans from scratch," a business community official said. "Companies cannot easily resolve the situation with self-help measures alone, and it is a frustrating reality."