"Crude Oil and LNG Prices Up 50% Would Raise Oil and Chemical Production Costs by 4.5%"

Bank of Korea Assesses Industry-Specific Impacts of the Middle East Conflict

If both crude oil and liquefied natural gas (LNG) prices rise by 50% simultaneously, the production costs for oil refining and chemical industries could increase by approximately 4.5%, directly impacting cost competitiveness, according to a recent analysis. The resulting decline in profitability is expected to hit small and medium-sized enterprises (SMEs) especially hard, particularly in everyday consumer sectors such as rubber and plastic products, which are more vulnerable to rising costs than large corporations.

On April 10, the Bank of Korea evaluated the industry-specific effects of the Middle East war from the perspectives of ▲supply chain risks ▲production costs and profitability ▲local production and demand in its "April Economic Situation Assessment."

Concerns Over Disruption in the Petrochemical Supply Chain...Risk of Industry-Wide Production Disruptions

From the supply chain perspective, the Bank of Korea noted growing uncertainty centered on the petrochemical industry, which relies heavily on raw material imports from the Middle East. More than half (56.3%) of Korea’s naphtha imports—a core input in petrochemicals—come from Middle Eastern countries. Since naphtha is supplied to a diverse range of sectors, from key export industries to everyday essentials, any disruption in the naphtha supply chain could negatively affect not only automobiles, shipbuilding, and semiconductors but also plastics, vinyl, and a broad spectrum of industries.

The Bank of Korea stated, "Currently, there have not been widespread production shutdowns in petrochemical products, but if the war in the Middle East continues, production disruptions are likely to become evident first in sectors that cannot bear rising raw material costs. If production shutdowns in the petrochemical industry—which supplies key materials to manufacturing overall—become widespread, it will inevitably lead to production disruptions in other manufacturing sectors as well, making thorough risk management essential."

Semiconductors also face supply chain concerns, as essential materials such as helium and bromine are predominantly imported from Middle Eastern countries. However, the Bank of Korea expects disruptions to be limited, as companies have stockpiled supplies and can respond by sourcing alternative suppliers, given the structure of critical material supply chains.

Production Costs Hit Oil Refining and Chemicals Hardest...Direct Blow to SMEs

The burden of rising production costs due to higher energy prices is expected to differ by industry, depending on each sector’s input-output structure. Using the 2023 Input-Output Table, the Bank of Korea modeled the spillover effects of energy price hikes on production cost increases. The analysis found that if crude oil and LNG prices both rise by 50%, industries that use these as direct raw materials—oil refining and petrochemicals—would face the largest cost burden, at 4.48%. This is followed by ▲primary metals including steel (2.35%) ▲metal processing (1.6%) ▲transportation equipment including automobiles and shipbuilding (1.55%) ▲computers and electronics including semiconductors (1.3%), in descending order of production cost pressure.

Increased production costs also impact corporate profitability, with the chemical industry facing the most direct hit. Other sectors sensitive to raw material and energy prices, such as electrical equipment, are also expected to see significant declines in profitability. In contrast, the oil refining industry is expected to be less affected due to its ability to adjust the timing of crude oil purchases, refining, and sales. The smallest impact on profitability is expected for the computer and electronics sector.

The Bank of Korea analyzed, "Profitability declines tend to be greater among SMEs than large corporations. SMEs in everyday consumer sectors are particularly susceptible to the negative impacts of rising energy prices."

Automotive Sector Faces Losses From Decline in Middle East Demand...Opportunities for Construction, Defense, Shipbuilding

Additionally, Korean manufacturers exporting to Middle Eastern countries are expected to inevitably suffer from decreased local demand. As of last year, the automotive industry exported about 6.9% of its global shipments to Middle Eastern countries, making it a prime example of an industry likely to be affected. If the war drags on, construction schedules for local plants in the Middle East could also be delayed, leading to some disruptions in local production plans.

On the other hand, the construction, defense, and shipbuilding industries could see opportunities from increased demand in the region. The Bank of Korea stated, "If postwar reconstruction projects begin in earnest, new demand could arise for the construction industry, while the defense industry may see expanded demand for products whose performance was demonstrated during the conflict. In shipbuilding, diversification of energy supply chains could increase demand for vessel types where Korea holds a comparative advantage."

This content was produced with the assistance of AI translation services.