Korean industries on alert as Iran-Israel war intensifies

Gasoline and diesel prices are displayed at a gas station in Seoul, Sunday. Yonhap

As the conflict between Iran and Israel further escalates with the United States inserting itself into the war, Korea’s industrial sector is on high alert over concerns that prolonged warfare could drive up global oil prices and disrupt supply chains.

The war between Iran and Israel, which began on June 13 with Israeli attacks on Iran’s nuclear and military sites, was intensified by U.S. strikes on three Iranian nuclear facilities, Saturday (local time).

Although the conflict is unfolding far from Korea, its economic impact is being felt close to home, with oil prices surging immediately after the attacks.

Both West Texas Intermediate and Brent crude oil prices were in the $60 range on June 12, but spiked to over $70 the following day after the initial attack.

As oil prices rise, shipping costs increase, along with concerns about a potential surge in ocean freight rates if Iran decides to close the Strait of Hormuz, a key chokepoint for about 11 percent of total global ocean freight and 34 percent of seaborne fuel oil exports.

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

The shipping industry is already facing increased fuel costs. According to the Korea International Trade Association, a 10 percent increase in oil prices raises average costs for the manufacturing sector by 0.67 percent, the service sector by 0.17 percent and overall industrial costs by 0.38 percent.

Appliance manufacturers such as Samsung and LG Electronics typically sign shipping contracts with terms ranging from six months to a year, so immediate logistics cost increases are unlikely. However, if price hikes persist, future contracts will inevitably reflect higher rates, forcing companies to absorb the additional shipping costs.

If the conflict drags on and triggers an economic slowdown, Korea’s steel and petrochemical industries — already struggling with sluggish performance — are likely to face additional cost pressures from rising shipping rates.

Hours after the U.S. strikes on Iran, the Ministry of Trade, Industry and Energy held an emergency meeting to assess the potential effects on domestic industries from the escalating tensions in the Middle East.

The ministry said the impact on Korea's oil and gas supply and demand, exports and supply chains is currently assessed as limited. Domestic oil tankers and gas carriers passing through the Strait of Hormuz are operating normally without any disruptions to imports.

In terms of exports, the share of exports to the Middle East accounted for 3 percent of Korea's total exports — from January to May — and so the direct impact on the nation's exports is estimated to be limited, according to the ministry.

However, in the event of a potential escalation or closure of the Strait of Hormuz, the ministry will maintain its emergency response teams, launched April last year, and collaborate with relevant agencies, including the Korea National Oil Corp., Korea Gas Corp. and KOTRA, to jointly operate a 24-hour monitoring system.

“Given that the situation in the Middle East could potentially worsen, we must remain ready to respond swiftly and effectively and fully prepared for any possible crisis,” Second Vice Industry Minister Choi Nam-ho said during the meeting.

Meanwhile, the finance ministry also held an emergency meeting to discuss the potential effects on the Korean economy and possible measures to mitigate adverse outcomes.