SK Hynix is planning to cut investment and production as the world’s second-largest memory chipmaker is increasingly concerned about possible supply disruptions amid an intensifying trade row between South Korea and Japan.

The South Korean company said on Thursday that demand recovery did not meet expectations and price declines were steeper than expected, forcing the company to cut its dynamic random-access memory chip production capacity from the fourth quarter. 

“SK Hynix plans to adjust production and investment flexibly” to respond to challenging market conditions, the company said in a statement. The company’s shares rose 2.6 per cent in Thursday afternoon trading on the Korea Exchange

Shares of SK Hynix and main rival Samsung have gained about 30 per cent and 20 per cent respectively this year on expectations of second-half earnings recoveries. 

SK Hynix also plans to further reduce its Nand flash memory output by more than 15 per cent, from 10 per cent previously. It added that investment earmarked for 2020 would be “significantly lower” than this year as it delays making capital expenditures on facilities. 

The announcement came after the company posted its lowest quarterly earnings in three years on weak chip prices as the South Korea-Japan trade tensions and the lingering disputes between China and the US added to uncertainty about the industry outlook. 

“We are trying to secure inventories of chip materials as much as possible?.?.?.?but we cannot rule out production disruption if Japanese export controls drag on,” Cha Jin-seok, head of the company’s finance and procurement, told analysts after announcing second-quarter results. 

Net profit at the world’s second-largest memory chipmaker was Won537bn ($455.8m) in the April to June period, down 88 per cent from a year earlier. Sales fell 38 per cent to Won6.45tn. 

SK Hynix is the latest South Korean technology company to report weaker quarterly earnings as the country’s electronics industry has been battered by the slowing global economy, the US-China trade war and Japan’s export curbs of key chemicals used in chipmaking and smartphone display. 

South Korean chipmakers are scurrying to ensure stable supply of key materials, with top managers at Samsung Electronics and SK Hynix visiting their Japanese suppliers this month after Japan imposed tighter restrictions on exports of high-tech materials. 

Mr Cha said SK Hynix was trying to diversify suppliers and minimise input of the chemicals affected by Japan’s export controls. Flat panel maker LG Display, which also relies on key Japanese materials, said this week it was looking to diversify its sources. 

South Korean officials are stepping up their diplomacy to resolve the trade dispute with Japan with trade minister Yoo Myung-hee visiting Washington to flag concern about its impact on global supply chains. 

The trade disputes weigh on demand recovery in the technology sector. Chip prices started falling last year amid oversupply but spot prices of DRAM and Nand flash memory chips jumped in recent weeks on concerns that Japan’s move may disrupt global supplies of smartphone and computer components. 

Analysts expect chipmakers’ earnings to bottom out in the fourth quarter and make a recovery next year as demand picks up amid capacity reduction. CW Chung at Nomura said Hynix’s decision to cut output and investment will help advance the industry recovery.

“Ironically, Japan’s trade restrictions are lifting chip prices as companies are restocking memory chips on fear of production disruption,” he said. “How long the recent price rises will continue depends on Japan’s attitude going forward.”