The HMM ultra-large crude carrier 'Universal Winner,' which had been trapped in the Strait of Hormuz following the Middle East conflict, is approaching an offshore crude oil unloading facility off the coast of Ulsan. The risks to navigation in Hormuz are transmitted to the South Korean economy via crude oil prices, transportation costs, import prices, and interest rates. [Photo=Yonhap News]

The judgment framework left by the market this week is the "cost pass-through from Hormuz."

West Texas Intermediate (WTI) rose 15.5% over the week, closing at $82.49 per barrel on the 17th. Brent crude also climbed approximately 16% to $88.10.

Concerns were compounded by the escalation of hostilities between the U.S. and Iran, a renewed decline in crude oil shipments through the Strait of Hormuz, and the potential blockage of the Red Sea shipping route. The market has begun to price in not only crude oil production volumes but also the stability of the very routes through which oil and gas are transported.

However, during the same period, the USD/KRW exchange rate fell from 1,501.4 won on the 10th to 1,480.4 won on the 16th, the last trading day in Korea. Despite the surge in international oil prices, the won actually strengthened.

On the surface, it appears that the Korean financial market has weathered the Middle East risk. However, the decline in the exchange rate was driven by a combination of financial factors, including the stabilization of U.S. inflation indicators, the Bank of Korea’s base rate hike, and the expected influx of proceeds from SK Hynix's issuance of American Depositary Receipts (ADRs).

The impact of soaring oil prices on Korea’s import prices, trade balance, and corporate costs has yet to fully materialize. While exchange rates shift immediately in financial markets, oil and gas prices affect the real economy with a time lag as they pass through contracts, transportation, inventory, and production processes.

On the 16th, the Bank of Korea also raised the base interest rate from 2.50% to 2.75% per annum, projecting that the energy prices that have risen so far will impact global and domestic inflation with a time lag.

The Bank of Korea determined that domestic inflation will remain above the target level for a considerable period due to heightened cost pressures and demand pressures resulting from economic improvement. It identified fluctuations in international oil prices and exchange rates as key uncertainties for the future inflation path and kept the door open for further interest rate hikes.

The issue in the Strait of Hormuz goes beyond just crude oil prices. If shipping is restricted, transportation times for crude oil and liquefied natural gas (LNG) increase, and insurance premiums and charter rates rise. Refineries and power companies must shoulder higher raw material procurement costs, while the aviation, shipping, and chemical industries face inevitable increases in fuel and raw material costs.

The order in which the bill for the war arrives in the Korean economy is relatively clear.

First, the prices of imported crude oil and gas rise, putting pressure on the trade balance and refining/power generation costs. Next, producer prices increase due to higher fuel, electricity, and transportation costs. Companies must then either pass these costs on to product prices or accept a decline in profit margins.

As production costs are passed through to consumer prices, the likelihood of further interest rate hikes by the Bank of Korea increases. Rising interest rates, in turn, pressure household debt, real estate, consumption, and corporate investment. It is a structure where the navigation risks originating in Hormuz travel through import prices and base rates to become a burden on household principal and interest payments.

Semiconductors are no exception. Even if demand for HBM and server memory remains strong, profit growth is diminished if factory electricity costs, logistics expenses, and the costs of procuring equipment and materials all rise simultaneously.

In particular, if energy costs remain high at a time when the price growth of general-purpose DRAM and NAND is slowing, profit gaps between products could widen further. One should not assume that the boom in high-value AI products will offset the cost shock across all memory products and semiconductor firms.

One should not conclude that the oil price shock has been resolved simply because the won strengthened this week. Rather, now that the strong won is partially offsetting the oil price rise, it is the time to assess the scale of the cost pass-through.

If the won turns weak again while international oil prices remain high, Korea could face a double shock of rising dollar-denominated oil prices and a depreciating currency.

The conclusion of this week's Money Insight is clear.

The risk in Hormuz does not end with the number of oil tankers. The longer the conflict drags on, the more Korea will receive a multifaceted bill consisting of higher import prices, rising interest rates, declining corporate profits, and a contraction in domestic demand.

There are three points to watch next week.

First, it must be verified whether the actual volume of vessel traffic in the Strait of Hormuz recovers.

Second, we must observe whether Brent crude breaks through the $90 mark.

Third, we need to check if the rise in oil prices begins to be reflected in both the USD/KRW exchange rate and domestic bond yields simultaneously.

**[Editor's Note]** Domestic exchange rate and interest rate figures are based on the 16th due to the Constitution Day holiday on July 17, and international oil prices reflect the closing prices on the 17th. This article is intended as reference analysis to explain the interconnected structure of the market and economy, not as investment advice.