Soaring Oil and Raw Material Prices Trigger Emergency in Domestic Industry

International Oil Prices Reach Highest in 7 Years
Profitability Decline Inevitable for Aviation and Steel Industries

[Asia Economy Reporters Oh Hyung-gil, Yoo Hyun-seok, Jung Dong-hoon] The rise in raw material prices has been significant since the beginning of the year. International oil prices surged to their highest level in seven years due to global economic rebound expectations and escalating tensions in Ukraine, while prices of major mineral resources fluctuated, triggering alarms in the industrial sector.

On the 2nd (local time) at the New York Mercantile Exchange, March West Texas Intermediate (WTI) crude oil closed at $88.26 per barrel, up $0.06 (0.07%) from the previous trading day. This is the highest level in about seven years since October 2014. The March Brent crude oil contract on the London ICE Futures Exchange also threatened the $90 per barrel mark during intraday trading, closing at $89.59 per barrel, up $0.43 (0.48%) from the previous day.

The spot price of Dubai crude oil, which has a large import share in Korea (based on the Singapore Exchange), continued its high-level trend, recording $87.58 per barrel as of the 28th of last month. LNG prices also more than doubled compared to a year ago, reaching 1,088,024.12 KRW per ton in January.

Domestic companies are increasingly concerned as the rise in international raw material prices emerges as a new adverse factor following the spread of the COVID-19 Omicron variant and supply chain disruptions.

In particular, the airline industry, where fuel costs account for up to 30% of fixed expenses, faces an unavoidable increase in cost burdens as international oil prices soar. Korean Air's fuel expenses reached approximately 1.2109 trillion KRW by the third quarter of last year, nearly matching the total fuel costs of 1.2473 trillion KRW for the entire previous year, highlighting the growing burden.

Low-cost carriers (LCCs) are even more worried. While major airlines can somewhat offset fuel costs through their thriving cargo business, LCCs, which primarily focus on passenger services, inevitably face heavier burdens.

Shipbuilding companies, which have been continuously receiving new orders since the beginning of the year, as well as major domestic export companies in sectors such as automobiles and home appliances, are also unlikely to benefit from the recent exchange rate gains due to rising raw material prices. The increase in oil prices raises cost burdens, affecting profitability.

A shipbuilding industry official said, "Iron ore prices are rising again following last year, increasing the likelihood of downward rigidity in the sales prices of steel plates," adding, "Given the already high level of steel plate price increases, price stabilization for mutual coexistence is necessary."

The steel industry is expected to suffer even greater damage due to rising raw material prices. Fixed costs increase when oil prices rise because fuel cost adjustments are reflected in electricity rates.

Moreover, the situation is becoming more serious as iron ore prices are also rising. The upward trend in iron ore prices continues amid expectations of recovering steel demand in China. Iron ore prices rose from $114.26 per ton in December last year to $128.6 per ton in January this year. Compared to the usual level of around $80 per ton, this is nearly a threefold increase.

Professor Lee Jeong-hee of the Department of Economics at Chung-Ang University said, "Import prices affect consumer prices with about a one-month lag, so domestic inflation will also rise," adding, "Since the rise in raw material prices is a global phenomenon, it is difficult for us to respond alone, and it will have a comprehensive impact on major industries such as steel, automobiles, and batteries for a considerable period."

[Image source=Yonhap News]

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