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Daily swings of 10 per cent are rare for a national stock index. Yet over the past week such volatility has become a recurring feature of Asian markets. Strikes on Iran were immediately followed by a 7 per cent drop in Korea’s benchmark Kospi index, then another 12 per cent the next day, while Japan’s Nikkei 225 also fell. A day later, the Kospi index rose 10 per cent, its strongest rally since the global financial crisis.
That early reaction reflects the fact that both Korea and Japan are among the world’s most energy import-dependent economies. Neither have meaningful local oil resources and both rely heavily on crude shipped from the Middle East. South Korea imports about 1bn barrels a year, meaning each $10 increase in global oil prices raises the country’s annual crude import bill by around $10bn. Crude prices surpassed the $100 mark on Monday, up from $72 before the strikes. It makes sense that when conflict erupts in the region, investors are quick to price in the possibility of higher energy costs.
But the direct impact of higher oil prices on listed companies is less straightforward. Across most local sectors, with the exception of airlines, shipping and petrochemicals, energy accounts for only a modest share of total operating costs. Industries such as electronics and machinery, which account for the largest chunk of Korean and Japanese markets, have lower direct oil exposure. Chipmakers and electronics group costs are tied closely to capital equipment and raw materials.
Chipmakers, which account for about 40 per cent of the Kospi’s total market value, are energy intensive in terms of electricity consumption but less exposed to crude oil prices directly and margins are driven by global chip demand and pricing. Assuming energy accounted for about 10 per cent of operating costs, a 25 per cent rise in oil prices would increase overall costs by 2.5 per cent.
The Japanese market is similar in that its largest companies are exporters and are less directly affected by oil prices. Automakers and industrial machinery makers like Toyota and Komatsu derive much of their earnings from overseas sales, meaning their fortunes are tied more closely to global manufacturing demand than to energy costs.
The reaction in the past week reflects the possibility of a sustained supply disruption and a prolonged surge in crude prices. Unless those worst-case scenarios materialise, the earnings impact on many blue-chip companies in Asia is likely to be less severe than the sell-off suggests.
