Sparked by New Restrictions on Exports by China
Following a ban on overseas transfers of rare earth permanent magnet manufacturing technology at the end of 2022, China has decided to control the export of gallium and germanium emerging as next-generation semiconductor materials, starting from August. The Russian-Ukrainian war, which has been going on for a year and a half now, is another headache for the international energy market, including the crude oil and natural gas markets.
As demand for key minerals required for high-tech industries such as semiconductors and batteries is surging, excessive dependence on Chinese minerals is considered a negative factor for the Korean economy. In fact, according to the Korea International Trade Association (KITA), Korea’s dependence on China for many key minerals for batteries including cobalt sulfate (100 percent dependence), artificial graphite (93 percent), natural graphite (91 percent), and lithium hydroxide (84 percent) exceeded 80 percent from January to May this year. Gallium and germanium, which the Chinese government recently announced export controls on, are also highly sought-after materials for next-generation semiconductors.
To make matters worse, with the enactment of the U.S. Inflation Reduction Act (IRA), securing a stable supply chain for key minerals is no longer an option but a must-have element for a nation’s industry. If batteries contain large amounts of minerals and components from China, they will not qualify for EV subsidies in the U.S., losing their price competitiveness. This explains why the Korean government sealed supply chain agreements in the Indo-Pacific Economic Framework (IPEF) and has been strengthening supply chain cooperation with major resource-rich countries such as Canada.
Korea’s high dependence on imported resources is also adversely affecting its trade balance. The nation’s record trade deficit (US$47.8 billion) in 2022 was largely due to a sharp rise in international energy and raw material prices due to the Russia-Ukraine war. The Korea Economic Research Institute found that every 1 percentage point increase in import prices leads to a trade deficit of US$880 million.
Recognizing the importance of resource supply chains early, the Yoon Suk-yeol administration tripled the size of the Special Loan Program for overseas resource development starting from this year. This is part of Korea’s efforts to secure resources for its industry on its own. Under the Lee Myung-bak administration, the program has a budget of more than 400 billion won but it was disregarded after the end of the administration. Finally, the program came to a temporary suspension in 2016. In 2017, a change was made in the program to tighten its lending criteria and complicate its application process, causing the budget execution rate to drop to the 20 percent range.
The current Yoon Suk-yeol administration is focusing on giving support to private sector-led overseas resource development, unlike the Lee Myung-bak administration. This is because the current administration believes that excessive government-led resource development may lead to the failure of state-run enterprises and that private Korean companies have accumulated excellent results in overseas resource development projects. In fact, POSCO International produces an average of 1.4 million cubic meters of gas per day from an offshore gas field in Myanmar which it secured when it was Daewoo International. This is equivalent to 10 percent of Korea’s annual gas consumption amount. LX International also earned 450 billion won in profits from 2020 to 2022 from Gam Coal Mine in Indonesia. The company won the operating rights to the mine when it was LG Corp.
This is why the current Korean government revived a tax credit for investment in overseas resource development companies for the first time in a decade through a tax law revision bill announced in July. The system allows Korean companies developing overseas resources to receive a deduction of up to 3 percent of their investment and capital if they invest in or contribute to acquire mining rights.
However, it is regrettable that the program does not include the success repayable loan system which companies want to use, analysts say. Currently, companies are required to repay 30 percent of loans if they fail in overseas resource development projects, but with the introduction of the success repayable loan system, 100 percent of the loan can be exempted. “It is fortunate that the current government positively views overseas resource development,” said an official of the resource development industry. “If the success repayable loan system that lowers business risk is implemented, companies will become more active about resource development.”