Value context and insight. lkm@koreatimes.co.kr
Surging commodity prices pose biggest threat to Korean firms
Getty Images Bank
By Lee Kyung-min
By Lee Kyung-min
A sharp rise in global oil prices and the subsequent spike in energy costs will be the biggest threat to export-reliant Korea, as implied by the country's trade balance registering a deficit last month despite record-breaking export volumes over the past year.
Korea registered a trade deficit of $590 million (702 billion won) in December, its first in 20 months, according to data from the Ministry of Trade, Industry and Energy. This was the result of a 37.4 percent year-on-year increase in imports offsetting an 18.3 percent year-on-year rise in exports.
The last trade deficit in the amount of $950 million was logged in April 2020, at the beginning of the COVID-19 pandemic. Other than the health crisis-sparked deficit two years ago, Korea has registered trade surpluses every month since 2008 when the global financial crisis hit the economy.
Businesses say corporate profitability will be hurt significantly by commodity price volatility, the biggest risk factor alongside logistics cost increases and currency fluctuations.
Global crude oil price surpassed $80 a barrel and the London Metal Exchange (LME) index, a comprehensive metal price indicator, hit an all-time high of 4762.80 in October. Data from the energy ministry showed December imports of crude oil spiked 73.8 percent from a year earlier, whereas fuel prices and natural gas skyrocketed 177.5 percent and 97.1 percent.
Robust growth in exports, they add, could be bogged down by the base effect from last year and unresolved global supply chain disruption vulnerabilities, fanning concerns that an economic recovery ― long underpinned almost exclusively by the growth driver ― could become elusive.
Most of the firms say government price stability measures will be critical to limit exposure to unforeseen external risks, a prerequisite to sustaining the momentum for double-digit year-on-year growth in exports, amid slow yet clear signs of a global trade recovery.
Businesses concerned
According to a survey conducted by Korea Economic Research Institute, a private think tank, of 150 firms on the list of Korea's top 1,000 exporters by sales, more than a third, or 36.4 percent, said raw materials cost increases were the biggest risk to their business conditions.
This was followed by a new wave of the pandemic (33.8 percent), diplomatic issues including the U.S.-China trade war (13.5 percent), won-dollar exchange rate volatility (5.1 percent) and the spread of global trade protectionism (3.1 percent).
The firms surveyed said that export growth this year will be limited to around 3 percent, far lower than the year-on-year growth of 26.6 percent in the first 11 months of last year.
The pessimistic view, the institute said, is largely in line with the year-on-year growth projections of 1.1 percent and 4.7 percent, respectively, by the Bank of Korea and Korea Development Institute, a state-run think tank.
Over two in five, or 41.3 percent said this year's exports will decline from last year, due to the overall weakening of export competitiveness brought on by tightening corporate regulations and soaring labor costs (28.9 percent), followed by deteriorating economic conditions in Korea's trading partner countries (27.6 percent) and diplomatic issues such as U.S.-China friction and Korea-Japan row (16.4 percent). Some 13.2 percent said supply bottlenecks from global supply chain disruptions, while 16.4 percent said strong exports last year translating into lower year-on-year performances.
Over half or 52.7 percent said corporate profitability would be similar to last year.
Some 29.3 percent of companies said their profits would deteriorate, outnumbering those that expected the opposite outcome (18 percent). Nearly half, or 47.4 percent of the former said so citing rising raw material prices, followed by logistics costs increase.
Similarly, according to a Korea International Trade Association survey of 1,260 export firms, over a quarter, or 26.1 percent, considered rising raw materials prices the biggest risk.
A Korea Small Business Institute survey showed 64 percent of the surveyed viewed the economy will not be able to recover for the time being, with 59 percent most concerned about production cost rises brought on by soaring raw material prices.