SK feels heat in anti-inflation drive

By Kim Tong-hyung

As policymakers begin to lose their cool in a losing battle against inflation, the country’s refiners and telecommunications firms are finding themselves on the receiving end of the frustration. These companies have been enjoying growth in industries where competition is limited, but Finance Minister Yoon Jeung-hyun stresses that this has to change, especially when households are growing weary of substantial rises in simple cost of living.

SK Group, which has its tentacles entrenched in both markets, has to be particularly uncomfortable.

In a meeting with officials from other economy-related ministries Tuesday, Yoon used the word ``monopolistic’’ to describe the market presence established by refiners and telecommunications carriers, and indicated that the government will take a harder look at opening up the sectors to improve competition and price transparency.

``We need to consider ways to revamp monopolistic markets like refinery and telecommunications to raise competition. We need more transparency in the pricing of oil products, as the upward trajectory of local prices has been inconsistent with the level of change in international oil prices,’’ said Yoon.

He urged the Ministry of Knowledge Economy to come up with a detailed plan to improve the retail structure of gasoline and other refined products. Knowledge Economy Minister Choi Joong-kyung replied that he already has a dedicated taskforce analyzing the pricing factors of oil products to identify the areas where companies might have been abusing their market power.

Yoon also claimed that consumers have been burdened with excessive telephone rates, pointing out that payment for telecommunications services account for nearly 6 percent of household expenses.

``Lowering the prices of telecommunications services will be crucial to ease the financial burden on the working class. But compared to their growth in productivity, telecommunications carriers aren’t free from criticism that they haven’t been lowering prices as much as they could,’’ said Yoon, calling for the Korea Communications Commission (KCC), the country’s broadcasting and telecommunications regulator, and the Fair Trade Commission to adjust pricing laws and regulations for the sector.

Meeting with journalists later in the day, Yoon continued to press refiners and telecommunications operators, saying it’s likely that the companies have enough room to lower prices.

``Industries with monopolistic retail structures often contribute in the rise of prices, and the strongest complaints from consumers have been targeted toward energy and telecommunications prices,’’ he said.

``The three telecommunications firms combined for 3.6 trillion won in profit last year, and the refiners were combining for 2.3 trillion won in profit just through September last year … When you buy a lot of stuff at a market, you often get a discount. The consumption of telecommunications services here is at an enormous level, and when you spend that much on a service that long, you have the right to ask for lower prices.’’

Yoon’s comments come at a time when the Lee Myung-bak government is pursuing an ``all-out war’’ against inflation, although the rising costs of essentials like food and energy indicates that policymakers are losing the battle on all fronts.

Despite the bold speechifying, the government, which continues to put growth before prices stability, is reluctant to clamp down on money supply to curb inflation because of the rising fear of ``stagflation,’’ a depressing combination of slowed growth and higher prices.

This has policymakers resorting to price controls, such as stemming the increase in utility bills, university fees and other items of consumer spending. The FTC also finds itself becoming an unorthodox anti-inflation tool for suppressing inflation as it cracks down harder on anti-competitive behavior. The country’s four refiners ― SK Energy, GS Caltex, S-Oil and Hyundai Oil Bank ― have been the major targets for the fair trade watchdog, as it pushes a full-scale probe to determine whether the companies are guilty of charging too much and to find evidence of collusion.

The KCC has been pushing a series of regulatory changes to strengthen the competition in the telecommunications industry, which has been dominated by the ``big-three’’ players of KT, SK Telecom and LG Telecom. Regulators are in the process of licensing a fourth carrier and allowing more companies to enter the wireless business as ``mobile virtual network operators,’’ which buys wholesale voice minutes and data from existing operators to provide their own brands of services.

The carriers have also been pressed to lower the prices of their voice calls, and SK Telecom, the top wireless carrier, has adopted a per-second billing scheme to replace its previous rate that charged for every 10 seconds. In addition, the KCC has been pressuring the companies to increase the voice allowance provided in the fixed-rate data plans for smartphone customers.

A telecommunication industry official, who refused to be named, balked at Yoon’s suggestions that the carriers have been overcharging customers.

``We have been under consistent pressure over the years to lower our prices. However, our cost burden has been increasing, as we have to spend more to build new networks, such as fourth-generation Long Term Evolution (LTE), and deal with rocketing data traffic,’’ he said.

According to a study by the KS Economic Research Institute, based on released industry figures, the Korean companies raised their domestic diesel prices by more than 53 percent in 2008, compared to an annual 18.5 percent increase in crude oil prices, while upping their gasoline prices by about 40 percent.

The crude oil prices dropped by 36.7 percent in 2009, but the prices of diesel sold domestically dropped by 25.4 percent, while gasoline prices were reduced by around 20 percent. The companies however dropped their export prices of diesel by 33.5 percent in 2009, which is more than a 49 percent adjustment when considering that the won fell 15.8 percent to the U.S. dollar that year. This suggests that the companies may have avoided massive losses from exports thanks to the sliding won. Critics speculate whether such a consistency in price strategies would be possible without some sort of collusion among the four refiners.

On other issues, Yoon said that the finance ministry isn’t considering providing a supplementary budget for combating the foot-and-mouth disease outbreak that has been devastating farms nationwide. The country has already spent around 2 trillion won to contain the disease, but Yoon noted that the number of animals being culled is starting to decline.