Companies cast a wary eye on Iraq

The deteriorating situation in Iraq has Korean companies worried about the potential negative impact of higher oil prices, while some construction companies working in the country are preparing evacuation plans.

After a week in which fighters of the Sunni Muslim militant group Islamic State of Iraq and Syria (ISIS) occupied northern Iraq and moved toward the capital of Baghdad, Korea’s main Kospi stock index dropped 1.03 percent to close at 1,990.85 as foreign investors were net sellers for the first time in 22 sessions.

Iraq, which produces about 3.3 million barrels a day, is the Organization of Petroleum Exporting Countries’ second-largest producer after Saudi Arabia. According to Korea National Oil Corporation, at 7.9 percent of oil imports, Iraq is the nation’s fifth-largest supplier behind Saudi Arabia, Kuwait, the United Arab Emirates and Qatar.

Analysts say that even though Iraq is not a major supplier, Korea gets the vast majority of its oil from the Persian Gulf and there are concerns about a destabilized Iraq’s effect on geopolitics in the region and global oil prices.

West Texas Intermediate, the United States benchmark crude, was up 38 cents to close at $196.91 per barrel on Friday, while Brent, the international benchmark, rose 31 cents to $113.41.

“The Korean economy belongs to the bloc that is sensitive to oil price fluctuations,” said Park Sang-hyun, a researcher at HI Investment & Securities in a recent report. “In a situation where the strong Korean won is pulling down our exports, an oil price hike would worsen the trade environment and add pressure to domestic demand.”

Analysts said that the key factor is whether the unrest in Iraq ends quickly or not.

“At the moment, companies that buy and consume a lot of energy will have cost pressure,” said IBK Securities analyst Lee Chung-jai in his report. “It is too early to say how the situation will impact each company’s performance, but if the situation is prolonged, it’s not going to be good for most of them.”

For Korean builders, the safety of their employees in Iraq has become the top priority. The Ministry of Land, Infrastructure and Transport already has asked local companies to move their workers to safe areas. This year, nearly 25 percent of overseas orders have been from Iraq, according to the International Contractors Association of Korea.

Hanwha Engineering & Construction, which has a development project in the city of Bismaya, has 1,000 employees in Iraq. Daewoo E&C and Samsung Engineering also have projects under-way in the country.

These companies say their projects are in relatively safe southern Iraq, but they are reviewing their safety and evacuation plans nonetheless.

Meanwhile, Yoon Sang-jick, minister of trade, industry and energy, had an emergency meeting yesterday with officials from Korea Trade-Promotion Investment Agency, Korea National Oil Corporation and Korea Gas Corporation to discuss the strife in Iraq.

According to the ministry, 100 Korean companies with 1,400 employees are working there, but no major damage has been reported.

BY JOO KYUNG-DON [kjoo@joongang.co.kr ]