Lee Min-hyung joined The Korea Times in 2014 and has worked as a journalist mainly in Korea’s finance, tech and automotive industry. He specializes in content creation, breaking news and in-depth analysis currently on transportation and mobility. You can reach him via mhlee@koreatimes.co.kr.
Refiners, heavy industries continue to suffer impact of Iran crisis
Oil prices are displayed at a gas station in Seoul, Thursday. Yonhap
By Lee Min-hyung
LCCs also take hit from rekindled Middle East risk
Korea’s refiners and chemical companies face a worsening supply crunch in crude oil and petrochemical feedstock following the latest warning from U.S. President Donald Trump that the country would strike Iran “extremely hard” for the next two or three weeks.
Uncertainty has intensified as Iran's de facto closure of the Strait of Hormuz, a critical chokepoint accounting for roughly a fifth of global crude shipments, looks set to persist. Overseas media outlets are reporting that Iran is considering transit fees of about $1 per barrel, while the U.S. has told allies to handle their own oil shipments.
Given Korea’s heavy dependence on Middle Eastern crude, the move would add to the cost burden for both refining and petrochemical industries here.
Korean companies are scrambling to deploy all available countermeasures, but their options are limited due to their huge energy reliance on the region.
The refining sector, which faces the most immediate impact, has begun short-term responses by utilizing reserves. They are exploring additional measures in anticipation of a prolonged conflict following Trump’s latest message.
The government’s strategic reserve swap program is helping ease the short-term supply instability, but concerns are still mounting over possible inventory shortages as early as May.
A petrochemical complex of Yeochun NCC, the operator of the nation's largest naphtha cracking center (NCC), in Yeosu, South Jeolla Province / Yonhap
The country’s four major refiners — SK Energy, GS Caltex, S-Oil and HD Hyundai Oilbank — remain heavily dependent on Middle Eastern crude, leaving them particularly vulnerable to escalating regional risks and rising procurement costs.
Global oil prices surged sharply following Trump’s remarks on Wednesday (local time), which will deal a continuous blow to the energy-intensive industries here.
The petrochemical sector has already begun adjusting operations. Some firms have lowered the utilization rates of their naphtha cracking centers (NCCs) to the 60 percent range due to unstable feedstock supply and rising costs. Major companies have also notified clients of the possibility of invoking force majeure clauses.
LG Chem recently secured 27,000 tons of Russian naphtha, in an effort to reduce its reliance on Middle Eastern supplies. Other petrochemical firms are also seeking to diversify import sources in preparation for a prolonged conflict.
The aviation sector is also under mounting pressure, with airlines declaring emergency management measures in response to persistently high fuel costs triggered by the escalating conflict.
Major carriers, including Korean Air and Asiana Airlines along with low-cost carriers, such as Air Busan, Jin Air, Air Seoul and T’way Air, have all announced emergency measures, as their operating expenses surge due to the latest oil price hike.
According to data from Korean Air, the airline has to pay a jet fuel cost of 450 cents per gallon starting this month. The figure is more than double its earlier forecast of 220 cents per gallon.
Korean Air's planes are seen on the apron of Incheon International Airport, Wednesday. Yonhap
Fuel costs typically account for around 30 percent of an airline’s operating expenses, making them a critical factor in determining profitability. With crude prices rising sharply, the share of the airlines’ fuel expenses is expected to climb even higher.
Airlines have responded by raising fuel surcharges, but the more expensive ticket prices are also feared to weaken travel demand. Low-cost carriers (LCCs) are particularly seen as highly vulnerable and forecast to take a significant hit from the Middle East conflict.
Most of them already posted losses last year, and chances are they will continue to report deficits at least until the first half due to the mounting fuel cost burden. Even if a ceasefire is declared, oil prices are unlikely to fall rapidly and may take several months to return to pre-conflict levels.
“The renewed Middle East risk will weigh heavily on LCCs’ earnings even through the third quarter, as their profit structure relies heavily on short-haul travel demand,” an official from the industry said.