Heightening tensions in Middle East to create fallout for Korean industries

An oil tankers pass through the Strait of Hormuz, Dec. 21, 2018. Reuters-Yonhap

Concerns are growing in Korea’s industrial sector over the repercussions from the heightening tensions in the Middle East, after Iran’s parliament approved a motion to block the Strait of Hormuz in response to a U.S. mainland airstrike.

Rising oil and logistics prices and other supply chain disruptions are feared to add more uncertainties to Seoul’s export-driven economy.

According to government officials Monday, approximately 70 percent of Korea’s crude imports come from the Middle East, and 68 percent are shipped through the Strait of Hormuz.

The strait has been a global shipping chokepoint, which Iran has long been using as a threat to stave off Western pressure. Iran’s state-owned broadcaster Press TV reported Sunday (local time) that the country’s parliament endorsed the closure of the strait, and the country’s Supreme National Security Council is set to make the final decision.

Global analysts said chances are slim for Iran to close the strait, but industry officials are paying close attention on the situation’s progress, as it will likely send global oil prices skyrocketing.

A map showing the Strait of Hormuz and Iran is seen behind a 3D printed oil pipeline in this photo illustration created Sunday. Reuters-Yonhap

As of Monday morning, West Texas Intermediate rose 3.36 percent to $76.32 per barrel, while Brent crude climbed 3.27 percent to $79.49. According to market tracker Oilnow, the average gasoline price in Seoul stood at 1,734 won on Monday, up 9 won from a day earlier.

For oil-related industries, rising crude prices deal a direct blow. As refiners import crude in U.S. dollars, higher oil prices lead to increased purchasing costs, and prolonged high prices can result in declining demand. In the petrochemical sector, rising prices of naphtha and other raw materials could harm their already weakening profitability.

“All we can say is that we are now closely monitoring the situation to contain supply chain uncertainties,” a domestic petrochemical company official said.

Rising maritime shipping costs are casting greater concerns. Samsung Electronics and LG Electronics export their TVs, washers and other bulky home appliances by sea, thus rising oil prices will push up their expenses. According to each company, Samsung Electronics and LG Electronics spent 2.96 trillion won and 3.11 trillion won for logistics last year, respectively, up 71.9 percent and 16.7 percent from a year earlier.

“After Yemen’s Houthi rebels began attacking vessels in the Red Sea last year, many shippers rerouted around South Africa, leading to a sharp rise in maritime freight costs,” another industry official said. “With ongoing uncertainties stemming from heightened tensions in the Middle East and U.S. tariffs, companies are reviewing multiple scenarios to optimize costs.”

People fill up their vehicles at a gas station in Seoul, Monday. Yonhap

In a broader perspective, businesses are expressing worries on an overall economic slowdown stemming from rising tensions.

“If Iran does block the Strait of Hormuz and the U.S. responds with a countermeasure, tensions in the region could escalate significantly, making business operations in the Middle East increasingly difficult,” said Lee Tae-kyu, a senior research fellow at the Korea Economic Research Institute.

“Market sentiment is likely to weaken, and even companies not directly tied to the region may grow more cautious in response to rising geopolitical risks. The impact could spread globally, affecting a wide range of economic activities.”

Lee also noted that other Middle Eastern countries may shift their investment priorities from social overhead capital or artificial intelligence infrastructure to strengthening national security. If that happens, Korean construction and IT companies currently operating or pursuing projects in the region could face delays or slowdowns.

President Lee Jae Myung attends a meeting with senior secretaries on the tensions in the Middle East at the presidential office in Yongsan District, Seoul, Monday. Yonhap

President Lee Jae Myung called the situation in the Middle East "alarming" and ordered officials to add any necessary contingency measures to the government’s extra budget proposal.

“Including the presidential office, all government organizations should remain on high alert and prepare emergency responses,” Lee said during a meeting with senior secretaries.

“Growing uncertainties are destabilizing the economy, especially foreign exchange and finance markets. I ask you to find necessary measures and carry them out as soon as possible ... I worry rising oil prices could lead to an increase in overall prices,” he said.

The president urged officials work closely with the Assembly to adjust the extra budget for addressing the impact of Middle East tensions, if necessary.