When International Raw Material Prices Rise by 10%, Producer Prices Increase by 0.43%... High Economic Correlation

[Asia Economy Reporter Kim Hyewon] As fluctuations in international raw material prices are highly correlated with domestic inflation and exports, voices have emerged calling for the government and companies to strive for stabilizing raw material supply and securing product competitiveness.

According to the "Analysis of Factors Affecting International Raw Material Price Fluctuations and Their Impact on Our Exports" released on the 30th by the Korea International Trade Association's International Trade and Commerce Research Institute, price fluctuations of international raw materials cause changes in the prices of all products that use raw materials as intermediate goods. As a result, industries with a high proportion of imported raw materials experience significant inflationary effects due to rising raw material prices.

Based on the input-output tables of the Bank of Korea's industry interrelation tables, it was estimated that if the import price of raw materials rises by 10%, the producer price of domestically produced goods would increase by 0.43% as of 2018. This is a 0.19 percentage point decrease compared to just after the financial crisis (0.62% increase in 2010).

In particular, industries with a higher proportion of imported raw materials experienced greater inflationary effects from rising raw material prices. In 2018, non-ferrous metals, which had an import dependence of 55.7%, saw domestic product prices rise by 2.87% when raw material import prices increased by 10%. During the same period, steel with an import dependence of 34.9% rose by 1.77%, and petrochemicals with an import dependence of 31.4% rose by 1.48%.

The rise in international raw material prices led to increased production costs for companies, higher export unit prices, and reduced export volumes. It is estimated that a 10% increase in international raw material prices results in a 0.7% rise in export unit prices and a 0.25% decrease in export volume. Export value increased by 0.45% due to the rise in unit prices. In fact, over the 20 years from 2000 to last year, the correlation between the raw material price index and South Korea's total export value was found to be high at 0.68.

The main common factors behind fluctuations in international raw material prices were analyzed as "global economic conditions" and "risk asset preference." Examining four indicators that make up international raw materials?international oil prices, non-ferrous metals, grains, and gold indices?it was found that the first principal component, global economic conditions, explained 86.8% of the overall raw material price fluctuations, while the second principal component, risk asset preference, explained 22.3%.

The report stated, "In a situation of great global economic uncertainty due to COVID-19, the movement of raw material prices can be used as a signal to gauge the direction of the global economy," adding, "The negative impact of the sustained rise in international raw material prices since the second half of last year on domestic inflation and exports is expected to be limited."

Kang Naeyeong, senior researcher at the Korea International Trade Association, emphasized, "However, small and medium-sized export companies are expected to face difficulties due to securing raw materials and rising prices," and added, "At the corporate level, it is necessary to secure competitiveness through cost reduction and development of high value-added products, and at the government level, mid- to long-term measures such as ensuring stable raw material supply without disruption should be pursued."

This content was produced with the assistance of AI translation services.