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Supply chain

Korea Inc. braces for rising costs, supply chain risks, volatile FX

Despite hopes of improving earnings on 'living with COVID' scheme, it's a challenge to make business plans for next year

By Nov 22, 2021 (Gmt+09:00)

Cargo trucks line up to replenish diesel exhaust fluid at a gas station in South Korea
Cargo trucks line up to replenish diesel exhaust fluid at a gas station in South Korea

Hopes for improving corporate earnings are rising as countries around the world are relaxing their anti-COVID-19 measures, but South Korean companies are facing risks from rising costs, especially commodity and shipping expenses, supply chain issues and volatile currency markets amid tighter monetary policies.

Local companies have grown more cautious since the pent-up consumption and post-lockdown splurging to purchase luxury and durable goods have been dwindling. So-called “revenge shopping” had supported their earnings earlier this year.

They are now emphasizing “active” measures to set up business plans for the next year as their earnings are largely expected to depend on how well they deal with unpredicted events.

RISING COMMODITY, LOGISTICS COSTS

Samsung Electronics Co. and LG Electronics Inc.’s home appliance units are struggling to maintain their profits amid surging logistics costs, according to industry sources on Nov. 22.

LG, the global home appliance giant, said increasing shipping expenses played a key role in its disappointing third-quarter earnings announced last month for its home appliance and air solution (H&A) division.

“Maritime and air freight costs are hitting record highs every day,” LG said during an earnings call. “These are expected to last until the first or the second half of next year, or even as long as one or two years.”

Surging commodity costs affected domestic companies, especially shipbuilders. Korea Shipbuilding & Offshore Engineering, Daewoo Shipbuilding & Marine Engineering Co. and Samsung Heavy Industries logged about 1 trillion won ($842.5 million) in operating losses each during the first half alone as those major shipyards earmarked provisions due to soaring steel plate prices.

Increasing commodity and logistics expenses already ramped up global import prices.

The United Nations Conference on Trade and Development (UNCTAD) on Nov. 18 said the current surge in container freight rates, if sustained, could increase global import price levels by 11% and consumer price levels by 1.5% between now and 2023.

SUPPLY CHAIN SHOCKS

Potential shocks on the supply chain from China are also threatening, given the recent diesel exhaust fluid (DEF) shortage due to suspended urea exports from the neighboring country.

South Korea is concerned over a similar crisis in other sectors as the country is relying more on imports from China.

Asia’s fourth-largest economy depended on imports from its larger neighbor for more than 50% of supplies of 1,088 materials such as urea, silicon, lithium and magnesium last year, according to a recent Korea Institute for Industrial Economics & Trade’s (KIET) report. South Korea relied on purchases from the mainland for more than 70% of supplies of 653 products.

Disruptions in lithium and magnesium supplies are expected to hit the chemicals, secondary battery and semiconductor sectors, the KIET said.

The chip industry is on high alert, especially since China may ban exports of raw materials for semiconductor production due to heightening tensions between the country and the US. A senior White House official said the Biden administration remains focused on preventing China from using US and allied technologies to develop state-of-the-art semiconductor manufacturing that would help China modernize its military, Reuters reported last week.

VOLATILE WON

South Korean companies grew more anxious about increasing volatility in the won currency, given their high dependence on trade. The won was the second-worst performing emerging Asian currency so far this year with an 8.5% loss against the dollar, according to Reuters.

They usually set up business plans for the following year in November, but most of them are struggling this year due to uncertainties over the Federal Reserve’s tapering. In December the US central bank is expected to decide on the pace by which it will scale back asset purchases.

Fed Vice Chair Richard Clarida on Nov. 18 suggested that a faster pace of stimulus tapering may be appropriate amid a quickening recovery and heated inflation, boosting the dollar.

The strength in the US currency, along with higher oil prices, hurt South Korea’s airlines most since they pay in dollars for aircraft leases and jet fuel purchases. Korean Air Lines Co., the country’s top carrier, suffers a loss of $30 million for every $1 rise in crude prices since it uses about 30 million barrels of jet fuel per year. 

“We are even considering a sale of idle assets in extreme cases,” said an airline industry source.
Korea Inc. braces for rising costs, supply chain risks, volatile FX

Higher interest rates also increased corporate fundraising costs. A rise of 1 percentage point in borrowing costs is estimated to contribute to a loss of 74.4 billion won for Hyundai Motor Co., according to the investment banking industry.

“Most companies are seeing business conditions in the next year as more unpredictable than in 2019 when the COVID-19 first hit,” said a senior official at a local business lobby group. “They have no choice but to set up various contingency plans and deal with them in a flexible way.”

Write to Sin-Young Park, Byung-Uk Do and Kyung-Min Kang at nyusos@hankyung.com

Jongwoo Cheon edited this article.

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