‘Supply Chain Domino’ from Iran Puts Korean Exports under Triple Threat

According to Financial News, South Korea’s exports, which set a record high of 700 billion dollars last year and had been on a steady upward trajectory, have run into a major obstacle in the form of a geopolitical crisis triggered by the Islamic Republic of Iran. Oil prices, exchange rates, and tariffs are expected to simultaneously squeeze corporate profitability, raising fears that the export tailwind that began last year could abruptly stall. The government has moved into an emergency response posture in anticipation of further instability in the Middle East. Officials say that, in the short term, reserves of crude oil and Liquefied Natural Gas (LNG) are sufficient, but industry leaders warn that "the real issues are price and supply chains" and are bracing for a prolonged crisis.

On the 3rd, Citi released a report titled "Assessing the Impact of Rising Oil Prices on the Korean Economy and Strong Semiconductor Exports in February." The report projected that if military conflict involving the Islamic Republic of Iran drives the average annual price of Brent Crude Oil up by about 20% to 82 dollars per barrel, South Korea’s economic growth rate this year would fall by 0.45 percentage points. In contrast, consumer prices would come under upward pressure of 0.6 percentage points.
Jin-Wook Kim, an economist at Citi, stated, "Because the Korean economy is highly dependent on crude oil imports and external trade, the cumulative negative impact of higher oil prices on Gross Domestic Product (GDP) growth and the current account balance is among the most severe of the major economies."
South Korea imports 70.7% of its crude oil and 20.4% of its LNG from the Middle East. Dependence on the region for petroleum products such as Naphtha reaches 66%. If tensions around the Strait of Hormuz escalate, the problem is unlikely to be limited to basic supply and demand; sharp price spikes, along with higher freight and insurance costs, are also highly likely.
Rising oil prices, in particular, push up production costs across the manufacturing sector and erode export competitiveness.
According to the Korea International Trade Association (KITA), a 10% increase in oil prices raises export unit prices by 2.09%, but export volumes fall by 2.48% due to weaker price competitiveness, resulting in an overall 0.39% decline in export value.
Joo Won, head of economic research at the Hyundai Research Institute, explained, "When international oil prices rise, the resulting cost pressures tend to be relatively stronger for us, which can weaken industrial competitiveness by driving up the relative prices of our products and reducing sales."

On top of this, the won–dollar exchange rate is threatening to break above the 1,500-won level, further increasing the burden on companies. A weaker won can provide short-term gains by improving export prices in dollar terms, but when combined with higher import costs for raw materials, it ultimately raises real cost pressures.
Given that South Korea relies on imports for most key raw materials, including energy, minerals, and grains, a high exchange rate could fuel inflationary pressure and delay interest rate cuts. This, in turn, can trigger a second-round shock by dampening global demand.
Another key variable is trade policy in the United States. If an energy shock originating in the Middle East reignites inflationary pressure in the United States, Washington may strengthen protectionist measures under the banner of safeguarding domestic industry and reshaping supply chains. Should it resort to higher tariffs or tougher non-tariff barriers, export conditions for Korean companies—already struggling with weakened cost competitiveness—could deteriorate further.
Some analysts say the overall impact of this shock will depend largely on how long the situation drags on.
Professor Koo Ki-bo of the Department of Global Commerce at Soongsil University noted, "If stability returns to the Middle East in a short period, conditions for securing crude oil could improve and the energy market might actually stabilize quickly." He added, "However, if the situation persists for more than four to five months, there is a strong likelihood that we will have to lower our export outlook and growth forecasts."
Meanwhile, on the same day, the Ministry of Trade, Industry and Resources, chaired by Kim Jeong-kwan, Minister of Trade, Industry and Energy of the Republic of Korea, held the 3rd Real Economy Inspection Meeting. Officials reviewed the supply and demand situation for oil and gas and ordered the preparation of emergency measures, including securing alternative sources of supply.
The government also began close monitoring of 1,063 companies for which exports to seven Middle Eastern countries adjacent to the Strait of Hormuz account for more than 50% of total shipments. In the event of logistics disruptions, it plans to proactively help them find alternative markets and provide transport support.
In particular, given that 54% of imported Naphtha depends on routes through the Strait of Hormuz, the government intends to simultaneously expand domestic substitution volumes and secure alternative supply chains if the crisis becomes prolonged.

aber@fnnews.com Park Ji-young Reporter