Rising trade tensions between Japan and South Korea threaten to disrupt the lithium cobalt battery market in East Asia in a rapidly developing sideshow to the United States-China face-off.

By removing each other from import white lists, the Japan and South Korea threaten supply chains that are key for two of the world’s largest car manufacturers.

In July, Japan suspended the export of three classes of chemicals to South Korea.

Japan is by far the largest producer of these chemicals: fluorinated polyimides, photoresists and hydrogen fluoride, and they are crucial in the production of semiconductors and other components used in South Korea’s tech sector.

The dispute partly has itsorigins in the Japanese occupation of Korea before and during the second world war.

In 2018, a South Korean court ruled that a number of Japanese companies owed compensation to individual Koreans forced into labor during the war.

This is contested by the Japanese government, which argues that the issue was resolved when the two companies normalized relations in 1965.

Other issues increasing tensions are a dispute over ownership of the Dokdo/Takeshima islands, as well as South Korea’s support for easing sanctions on North Korea, which Japan strongly opposes.

The trade dispute kicked into high gear on August 2 when Japan said it would remove South Korea from its white list of favored economic partners.

South Korea retaliated on the same day by removing Japan from its own list.

This means that goods shipped from one country to the other will now face additional screening and red tape.

Lithium threat
The move poses a threat to automotive supply chains.

"Our main cause for concern is the US/China trade war as that is seen to be undermining global growth significantly. Other bilateral trade disputes, such as the one brewing between Japan and South Korea, are not going to help matters," Fastmarkets’ head of battery raw materials research William Adams said.

South Korea does supply lithium-ion battery products to Japan, so there could be an impact there if the trade dispute escalates, but so far there have been no reports of any disruption, according to Fastmarkets research.

"The countries getting involved with thetrade disputes should we aware they are going to send a strongmessage to potential overseas customers that they would be better off keeping their supply chains as domestic as possible and failing that as short as possible," Adams added.

"The emerging European EV industry is already concerned about relying on lithium-ion battery supply from Asia; these disputes will be making them more concerned."

Data from a South Korean industry body released on Monday August 5 showed slumping sales of Japanese car brands in South Korea in July, reflecting the effect of boycotts even before the import restrictions kicked in.

Both South Korea and Japan boast major battery and automotive industries, and supply chains forelectric vehicles cross between the two countries.

"We are trying to understand the effectsof this policy," one major Japanese manufacturer said. "This could affect trade in the future, but not sure about the imminent effects."

Minor metals markets shrug off risk
Japan is also a major exporter of some key minor metals, including indium and gallium. But market sources played down the potential effect.

"We do not think the escalation of trade tensions between South Korea and Japan will affect our procurement for minor metals including indium," a minor metals market source from South Korea said. "We can easily find suppliers in other countries, and Japan knows this clearly."

The market source pointed out at the same time that its third-quarter procurement for indium from Japan increased to more than 30% from less than 10% in the first two quarters, because of Chinese prices being higher during the period.

A Chinese source also said effects had yet to manifest.

"I do not deny the fact that there might be some impact on the minor metals market, but it would be relatively limited because as far as I am concerned the trades for minor metals such as indium between both countries are mainly bonded by long-term contracts," a China-based market source said.

"The domestic price will be unfazed by trade spats between South Korea and Japan because the concerns over more auctions for indium stocks held in Fanya are dominating the market now," the source added.