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| Low oil prices may be here to stay for a while. The photo on the right shows today's oil prices at a gas station in Guro-gu, Seoul, while the left photo shows the prices from a year ago. / Yonhap |
By Choi Kyong-ae
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On Monday, U.S. benchmark West Texas Intermediate crude and Brent sank 5.8 percent and 5.3 percent, respectively ― hitting levels not seen since February 2009.
Last week, the Organization of Petroleum Exporting Countries (OPEC) failed to tackle a growing supply glut due to objections from Iran to production cuts. Crude prices remained at below $40 a barrel, Tuesday.
"International oil prices now trade at the upper end of $30 and there seems to be some downward pressure on the prices due to oversupply and low demand in the global economy," said HI Investment & Securities analyst Park Sang-hyun. "Korea, heavily dependent on exports, will be one of the victims of the ongoing situation."
In its earlier prediction, the brokerage expected Korean exports to begin to improve in the first half of next year, helped by the free-trade agreement with China and the won's gradual weakening against the dollar in coming quarters following an anticipated U.S. rate hike next week.
But ever-declining oil prices are throwing a wet blanket over the positive effects expected from the free-trade deal with Asia's fastest-growing economy, Park said.
"In particular, further declines in oil prices will make shippers in the Middle East and other oil-rich countries delay or cancel more of their orders for oil-exploring and -producing offshore facilities. This may be the straw that breaks the camel's back for Korean shipbuilders."
The top three shipbuilders here ― Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering ― have inked heavy losses due to increased manufacturing costs for ship orders it won at cheaper prices following the 2008 financial crisis. Order delays or cancelations by shipping companies have also hit their bottom line in recent years.
Korean builders such as Hyundai Engineering & Construction and Samsung Engineering are not the exception, as oil majors such as Saudi Aramco reduce or delay their investment in construction projects for plants and other facilities, analysts said.
"As lower oil prices drive down export prices of products made by petrochemical companies, they are set to lose further," said Yuanta Securities economist Jeong Won-il. "Oversupply in China is also curbing shipments by Korean steelmakers such as POSCO to the world's most populous country."
Unfriendly exchange rates will continue to hurt exports at least until the first quarter of next year, as the won has been trading relatively strongly against the greenback compared to other currencies, he said.
A strong won has a negative impact on financial results when businesses convert dollar-denominated overseas earnings back into the local currency.
In the January-November period, Korea's exports fell 7.4 percent to $484.6 billion from the same period the previous year, according to the Bank of Korea (BOK).
Car makers and airlines are two major industries which benefit from low oil prices. But the former is vulnerable to the won's weakness as it cuts into converted overseas earnings.
All in all, analysts said weak exports will inevitably have an impact on the country's growth this year which the BOK forecast at 2.7 percent.
"With exports making up more than 40 percent of gross domestic product, sustaining robust domestic growth in the face of waning external demand is likely to prove a tall order," said BNP Paribas economist Mark Walton in a research note.
