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Raw material price increases could burden Korea’s economy

Rising raw material prices are putting pressure on businesses in Korea, although the country’s private and industrial sectors have been showing signs of a steady recovery from the early effects of the COVID-19 pandemic.

Analysts and economists said Monday the estimated economic impact of the surging raw material prices would be limited mostly thanks to increased performances of the country’s major exporters.

Korea’s economy is export-driven and the global surge in commodity prices could result in rising manufacturing costs, which may in turn weaken exporters’ price competitiveness.

Higher commodity prices have lifted the profits of some companies, but they also stand to increase the costs for downstream businesses further along the supply chain.

The average price of crude oil has been rising for four straight months, from $62.95 per barrel in April to $73.28 per barrel in July, according to the World Bank’s latest data released in early August.

Of other major commodities, aluminum also saw its price on an upward trend throughout this year, up from $2,003.98 per metric ton in January to $2,497.64 per metric ton in July.

Under the circumstance, the price of intermediate goods, which are mostly imports, increased and that overall imports soared 52.1 percent year-on-year to $35.8 billion in the Aug. 1-20 period.

This resulted in a trade deficit of $3.5 billion during the same period ― the first in 15 months ― despite a 40.9 percent year-on-year jump in exports.

In the worst-case scenario, the price increase of raw materials along with new surges of the pandemic and the interest rate hike are feared to push the companies, especially small- and medium-sized enterprises (SMEs), toward bankruptcy.

In accordance with such worries, the profitability of some consumer goods industries has yet to fully recover to the level before COVID-19.

Despite Korea’s export-reliant economy, coupled with the soaring commodity prices, this trend has clearly increased some pressure on the operation of midstream and downstream industries, economists said.

While they are saying the possibility of the country seeing such a worst-case scenario is less likely, a rally in raw material prices may drag down the country’s industrial recovery.

Financial authorities are asked to monitor and take necessary measures to avoid commodity costs feeding through into consumer prices. Korea’s economic growth rate this year has been set for 4 percent.

“The changes in global raw material prices are highly interrelated with exports, inflation rate and other economic factors,” the Korea International Trade Association (KITA) said. It noted, for every 10 percent increase in global raw material prices, Korea’s overall export good costs rose by 0.7 percent while its export volume shrank by 0.25 percent.

KITA also noted the more industries rely on imported raw materials, the higher their product prices will rise.

For instance, imports account for 34.9 percent of the steel supply and 31.4 percent of non-metals. And for every 10 percent increase in their respective price, the price of steel-made goods jumped by 1.77 percent and goods made of non-metals by 2.87 percent.

“It is not surprising companies are extremely concerned by the surge in commodity prices,” said the Korea Chamber of Commerce and Industry (KCCI), the country’s largest business lobby group, referring to its latest survey released on Monday. Of the 104 conglomerates and 206 SMEs surveyed, 81.6 percent of them picked rising raw material prices as the biggest burden on their businesses as well as the economy.

The ongoing surge of COVID-19 infections and the interest rate increase were other major factors against the economy.

Compared to the gradual track of industrial recovery, consumption is still lagging behind, which is cited as the top challenge for private firms facing increased costs and consumer confidence, which still has yet to recover.

Without disclosing details, a component manufacturer that heavily uses aluminum as an intermediary good hinted at possible bankruptcy in the long term if the aluminum price is not kept under control.

“The price of aluminum has been soaring. However, it does not mean we can simply reflect the increase in our produce price because it will make our customers stop buying from us and instead look for other sellers who have cheaper products,” it said. “We accordingly have seen a net loss despite a sales increase.”

A chemical company voiced a similar view, saying its net profit diminished 10 percent to 20 percent even though the industry is recovering from the pandemic.

The KITA anticipates SMEs will be hit harder by the situation and that the government will need corresponding measures to support them.
Source: The Korea Times

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