Iran War: Economic Impact & Risks for South Korea – Stock Market, Won & Supply Chains

The economic fallout from the escalating conflict between Israel and Iran is reverberating across the globe, and South Korea is feeling the strain. While geographically distant, the interconnected nature of the modern economy means that disruptions in the Middle East quickly translate into challenges for even highly developed economies like South Korea’s. Beyond the immediate concerns about energy supplies, the war is placing pressure on interconnected supply chains for industrial inputs and exports, triggering volatility in financial markets and prompting government intervention.

Stock Market Volatility and Currency Devaluation

The most immediate impact has been felt in South Korea’s financial markets. When markets opened following the initial attacks, the KOSPI, South Korea’s benchmark stock index, experienced its largest-ever decline, falling 18 percent over the first two trading days. According to CNBC, this sharp drop reflected investor anxieties about the potential for a prolonged conflict and its impact on global economic growth. While the KOSPI has partially recovered, it remains 13 percent below its pre-war value as of the fourth week of the conflict.

Concerns about the broader economic impact have similarly driven down the value of the South Korean won, reaching levels not seen since the Global Financial Crisis. Recent trading has seen the won hovering around 1,500 to the U.S. Dollar. Reuters reported this depreciation adds to inflationary pressures as the cost of imported energy and other essential goods rises. However, a weaker won could also provide a boost to South Korean exports by making them more competitive in international markets.

Government Intervention and Price Controls

In response to rising prices and fears of price gouging, the South Korean government has taken unprecedented steps to stabilize the domestic market. Seoul has imposed price caps on refined petroleum products for the first time since 1997, as reported by the Korea Times, and established price monitoring for 23 essential items to prevent excessive price hikes. The government has also raised its crude oil supply disruption alert to level 2, signaling a heightened state of preparedness.

These measures are intended to mitigate the immediate impact of the conflict on consumers and businesses. However, their long-term effectiveness will depend on the duration and intensity of the war. Economic forecasts suggest that a relatively short conflict is manageable, but a prolonged war could significantly dampen South Korea’s economic growth.

Growth Rate Projections and Stagflation Risks

If the war persists for up to three months, We see projected to decrease South Korea’s growth rate by 0.3 percent. The Korea Times details the potential for a more severe economic downturn if the conflict drags on. A prolonged war increases the risk of stagflation – a combination of stagnant economic growth and rising inflation – as supply chain disruptions and declining exports weigh on the economy. Should the conflict last a year, South Korea’s growth rate could fall to zero.

While the Middle East accounts for only around 3 percent of South Korea’s total exports, the region is a crucial market for certain industries. Slowing global economic growth, driven by the conflict, would reduce demand for South Korean exports more broadly.

Energy Security and Strategic Reserves

The disruption to petroleum and LNG exports from the Middle East is a primary driver of economic concerns. South Korea imports 62 percent of its petroleum and 20 percent of its LNG from within the Strait of Hormuz. Reuters highlights the country’s vulnerability to disruptions in this critical shipping lane. The International Energy Agency (IEA) estimates that global oil production could decline by 8 million barrels per day in March, representing a 7 percent reduction. Goldman Sachs estimates that disruptions to Qatar’s LNG production have taken 19 percent of the world’s total production offline.

To mitigate these risks, South Korea maintains a strategic petroleum stockpile equivalent to over 200 days of consumption. In coordination with the IEA, Seoul plans to release 22.46 million barrels of oil from its strategic reserve as part of a larger international effort to stabilize prices. SpGlobal details this coordinated release. The adequacy of South Korea’s LNG reserves is less clear, with regulations requiring only nine days’ worth of supply, whereas the government claims to hold significantly more. Recent Iranian strikes on Qatar, which could keep 17 percent of Qatari production offline for three to five years, add to these concerns.

Beyond Energy: Supply Chain Disruptions

The impact extends beyond energy. The Middle East plays a significant role in supplying critical inputs for South Korea’s industrial sector. A list of 41 key items for South Korean supply chains reveals that 70 percent are sourced from the Middle East, particularly from Türkiye, Saudi Arabia, and Israel.

One immediate concern is the supply of naphtha, a core feedstock for South Korea’s petrochemical sector, which generates roughly 7 percent of the country’s exports. Shortages have already forced LG Chem to declare force majeure on exports of dioctyl terephthalate, a key plasticizer. Even basic goods, such as plastic trash bags, are facing production delays. The disruption in naphtha extends to high-value industries like automotives, healthcare, shipbuilding, and consumer goods.

Semiconductor Industry Vulnerabilities

The war is also disrupting the semiconductor supply chain. South Korea relies heavily on the Middle East for bromine (97.5 percent from Israel) and helium (64.7 percent from Qatar), as well as specialized semiconductor equipment. While semiconductor firms have some reserves of helium and a market surplus existed at the start of the conflict, these are risk areas if the war continues.

The semiconductor industry’s vulnerability extends to its export markets. Taiwan, the primary market for South Korean high-bandwidth memory (HBM) used in AI chips, relies on LNG for 53.3 percent of its electricity. While Taiwan currently has adequate LNG supplies, potential shortages later in the year could disrupt HBM production. South Korean firms are considering resuming naphtha imports from Russia to address supply constraints.

Export Impacts and Industry-Specific Concerns

Although the Middle East accounts for only 3 percent of South Korea’s exports, it is an key market for certain industries. Hyundai Motor Group, for example, generates 15 percent of its global sales in the region. Increased shipping costs and potential declines in regional demand pose challenges for the automotive industry. Exports of K-beauty products and K-foods, which have seen significant growth in recent years, are also at risk. Samsung and LG Electronics, major players in the electronics sector, also have substantial exposure to the Middle Eastern market.

Looking Ahead: Diversification and Resilience

The war’s ultimate impact on South Korea will depend on its duration and the extent of supply disruptions. The early shocks reveal deeper structural vulnerabilities, particularly the concentration of critical inputs within a limited number of suppliers and transit routes. The closure of the Strait of Hormuz and disruptions to Qatari LNG infrastructure have underscored the speed with which these chokepoints can translate into economy-wide pressures.

Moving forward, South Korea needs to prioritize diversification of sourcing for critical inputs, build greater redundancy into its energy and materials supply chains, and enhance coordination with international partners to manage future shocks. The recent disruptions, following the pandemic and Russia’s invasion of Ukraine, reinforce the need for continued efforts to improve supply chain security. The government is likely to continue exploring options for bolstering strategic reserves and fostering closer ties with alternative suppliers, while also seeking diplomatic solutions to de-escalate tensions in the Middle East.