After Oil Prices Surge, Kospi Profits Plummet... First Post-COVID Quarterly and Annual Downward Signal

[Asia Economy Reporter Lee Seon-ae] As concerns over costs rise due to the sharp increase in international oil prices, warnings about the decline in KOSPI operating profit margins are growing louder. Although the KOSPI operating profit forecasts showed a positive trend with upward revisions since the beginning of the year, they have been revised downward again from mid-February to recently. There is a growing call to establish response strategies for the ‘lack of profit momentum’ on a quarterly and annual basis.

According to the financial investment industry on the 3rd, international oil prices have risen to their highest level in 10 years. On the 2nd (local time), the April delivery futures for West Texas Intermediate (WTI) crude oil in the U.S. rose $7.19 (7%) from the previous session to $110.60 per barrel. This is the highest level since May 2011.

Based on past data, the time lag for the sharp rise in international oil prices to affect changes in KOSPI operating profit margins averages two quarters. The problem is that the average WTI price in the third quarter of last year surpassed $70, breaking the previous high from the third quarter of 2018. Kim Min-gyu, a researcher at KB Securities, said, "Analyzing how much the WTI increase rate affects changes in KOSPI operating profit margins with a certain time lag, it began to have a significant impact from two quarters later," adding, "If the strong trend continues as it did with the WTI surge in the third quarter of 2021, we will be able to visually confirm the deterioration of profit margins starting from the first quarter earnings season."

In fact, the downward revision of profit margin forecasts is accelerating due to rising oil prices. The operating profit margin forecast for KOSPI manufacturing was close to 10% in the second half of last year but has fallen below 8.5%. According to financial information provider FnGuide, the operating profit forecast for KOSPI 200 started at 236 trillion won at the beginning of the year but began to decline from mid-February and has currently decreased to 232.3 trillion won.

Han Ji-young, a researcher at Kiwoom Securities, emphasized, "Considering that domestic and external uncertainties still exist and the profit momentum is also negative, further downward revisions are possible," adding, "It is burdensome that for the first time since the early days of COVID-19 in 2020, both quarterly and annual profit forecasts show a predominance of downward opinions."

The majority of sectors are also under downward pressure. Until the beginning of the year, semiconductor sectors benefited from improving business conditions, transportation from the normalization of economic activities and logistics, and finance from rising interest rates, showing strong upward momentum. However, since early February, inflationary pressure due to rising oil prices has continued, expanding the downward revision range for utilities and chemicals, with the speed of downward revisions surpassing that of upward revisions.

Based on KOSPI 200, the operating profit forecast for the utilities sector has dropped by 8.6 trillion won compared to the beginning of the year. Chemicals and software have also decreased by 3.3 trillion won and 1.3 trillion won, respectively. Steel and automobiles have fallen by 1 trillion won and 700 billion won, respectively.

Accordingly, advice has emerged that cost pass-through ability must be considered essential when establishing sector-specific investment strategies. This is because sectors that can defend profit margins by raising selling prices despite increased cost burdens can leverage inflation advantageously. Cost pass-through ability can be understood by observing the variance in profit margins when sales increase. Past experience of consistently maintaining profit margins when sales increased can be evidence that in an inflationary environment where costs and sales rise simultaneously, profit margins can be maintained through cost pass-through. Sectors with large profit margin variance or declining profit margins during sales growth periods indicate that cost pass-through did not occur properly.

Researcher Kim Min-gyu said, "Hotels and leisure maintained profit margins even when sales increased, but utilities showed large variance," analyzing, "Regarding sector-specific price pass-through ability, cosmetics, apparel, toys, essential consumer goods, media, education, hotels, and leisure services are advantageous; telecommunications, machinery, and automobiles have moderate pass-through ability; shipbuilding, utilities, and construction have poor pass-through ability and are likely to be disadvantaged by inflation."

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