Korean firms face triple whammy of soaring KRW, freight rates, Biden

South Korea’s major companies are facing a triple whammy of challenges — a stronger Korean currency, soaring seaborne and air freight rates and a new US administration under the Joe Biden leadership.

Analysts say that if Korean companies continue to suffer from such challenges in coming quarters, it will deal a crushing blow to Asia’s fourth-largest economy, which heavily relies on exports for growth.

The Korean won, which is already hovering around a near two-year high level against the dollar, is widely expected to continue its uptrend under the Biden presidency.

Last Friday, the Korean currency finished up 7.8 won at this year’s high of 1,120.4 won per dollar in Seoul trade. That marked the won’s highest close since Feb. 27, 2019.

BIDEN PRESIDENCY TO BOOST WON

The foreign exchange market expects President-elect Biden’s economic policy, promoting a huge stimulus package, to provide a tailwind for the won, already one of Asia’s best performers.

“Expectations for the US economy to recover on the back of stimulus measures will help lift risk appetite in Asia, boosting the won above the key resistance of 1,100 near-term,” said a local currency strategist.

If the dollar-won exchange rate falls 1%, meaning the won strengthening by 1% versus the greenback, Korea’s total exports will decline by 0.51%, according to the Hyundai Research Institute.

Local automakers, including Hyundai Motor Co., are particularly susceptible to currency volatilities.

A stronger won generally weakens Korean exporters’ price competitiveness in overseas markets, while providing support to importers, such as oil refiners, which pay for raw material imports in dollars.

Samsung Electronics Co. and LG Electronics Inc., which posted record operating profits in the third quarter, could also face a tougher fourth quarter if the local currency continues its upward run.

While Biden’s anticipated attempt to mend the multilateral trade paradigm battered by his predecessor Donald Trump will be a boon for the export-reliant Korean economy, his climate change commitment and pro-labor stance may pose a double-edged sword for Korean companies.

During his presidential campaign, Biden said the US government will impose a “carbon adjustment fee” on imports from countries that fail to cut emissions.

SOARING FREIGHT RATES

Korean exporters are also suffering from surging sea freight rates amid signs of rebounding global trade.

The Shanghai Containerized Freight Index (SCFI), a barometer of global freight rates, reached a fresh record high of 1,664.56 on Friday, according to the shipping industry. The sea freight rate on the US route, which Korean exporters often use, has risen threefold from a year earlier to a record $3,871 per forty-foot equivalent unit (FEU) in container shipping.

Korean companies have faced higher shipping costs since September, as major shipping firms reduced their business amid the COVID-19 pandemic, while the economic recoveries of the US and China pushed up demand.

Industry officials expect conditions to worsen in coming weeks as demand for shipping services will rise on stronger sales of consumer products ahead of Christmas and year-end promotions by retailers.

LG Chem Ltd., the world’s largest battery maker, recently shipped electric-vehicle battery cells produced at its China plant to Europe via the Trans-Siberian Railway (TSR) and the Trans China Railway (TCR) lines, as the company couldn’t secure container ships.

“Seaborne freight rates are now higher than railway rates. Disruptions in transport will cause a headache for many companies,” said a local logistics company official.

According to the Korea International Trade Association (KITA), local companies filed 40 shipping complaints with the trade body last month.

“Up until September, such complaints came from mostly small enterprises. But even big companies like Samsung, Hyundai and SK are now complaining about shipping difficulties,” said a KITA official.

A local electronics goods maker was recently notified of the termination of a contract with a foreign shipping company after the Korean firm rejected a request for a $1,000 increase per FEU for products bound for the US.

An auto parts maker, meanwhile, had to use an air cargo service ten times more expensive than sea freight rates to send products to the US as its contracted foreign shipping firm slashed its sea routes, citing reduced demand due to the COVID-19 pandemic.

The government is working on countermeasures to ease the logistics challenges facing local companies, but experts say the rates of sea and air shipping services may rise further next year if ships and flights are mobilized to deliver anticipated COVID-19 vaccines.

AIRLINES BENEFIT FROM RISING TRANSPORT COSTS

Despite the heavier burden for exporters, local air carriers are benefiting from the rising transport costs.

The country’s two major airlines, Korean Air Lines Co. and Asiana Airlines Inc., have converted some of their passenger jets into cargo planes to accommodate increasing cargo loads.

In September, Korean Air converted two of its Boeing 777-300ER planes into cargo carriers. The nation’s flag carrier last week reported a third-quarter operating profit thanks to robust cargo operations.

Asiana, which owns 12 cargo carriers, has also transformed one of its passenger aircraft A350-900 jets into a cargo carrier to enhance its cargo operations.

The Tac Index data showed air freight rates for the North America-Hong Kong routes more than doubled to $6.21 per kilogram at the end of October from early this year.

“The fourth quarter is the high season for air cargo traffic because of Black Friday shopping and Christmas demand,” said an air industry official.

HYUNDAI HEAVY MAY COME TO RESCUE

Industry officials say the logistics bottleneck could ease if Hyundai Heavy Industries Holdings Co. can deliver several 16,000 twenty-foot-equivalent-unit (TEU) container ships currently under construction at an earlier date.

“We expect to finish building at least three of eight container ships under construction by the end of this year. We have no problem delivering the ships if conditions are met,” said a Hyundai Heavy official.

HMM Co., Korea’s biggest shipping company, has acquired 12 units of 24,000-TEU container vessels this year, but they are all deployed to the European routes, signaling difficulties for US-bound Korean exports.

Some industry officials say that Korea’s shipping difficulties may have exacerbated since the collapse of Hanjin Shipping Co. in 2017, which halved the shipping capacity of the Korean flag-carrying container vessels.

Write to Man-Su Choe, Kyung-Min Kang and Il-Gue Kim at bebop@hankyung.com
In-Soo Nam edited this article.