"Small Businesses 'Lose More the More They Sell'... Raw Material Prices Skyrocket but Supply Prices Remain Unchanged"

Raw Material Price Surge Hits SMEs... Increases Up to 90%
Growing Uncertainty in International Energy Prices Such as Natural Gas and Crude Oil
Most Struggling to Reflect Cost Increases in Delivery Prices

#. Company A, which supplies construction materials, is feeling a crisis that it might have to close its doors this year due to skyrocketing raw material costs. Compared to January 2020, the early days of COVID-19, the cost of raw materials used by this company has increased by 70%. For some products, prices have risen by as much as 90%. Large corporations supplying raw materials promptly reflect any price increase factors and consistently raise prices. Recently, prices have risen further due to the Ukraine situation and crude oil price hikes. However, the problem is that when making products with these expensive raw materials and supplying them to large construction companies, the price is not properly reflected. They tend to raise prices only slightly, fearing disadvantages in bidding. A representative from Company A lamented, "Whether we operate the company or not, we are at a loss."

#. Company B, an electronics components and computer cable manufacturer located in Changwon, Gyeongnam, has also been hit hard by raw material price increases over the past year. They import raw materials such as steel plates and copper for cables used in electronic products, and prices have soared up to 50% compared to last year. The purchasing team calculated that raw material prices for pneumatic products rose by 49%, cables by 21%, and connectors or terminals by 20%. The problem is that additional price hikes are expected around April to May. This is due to the prolonged COVID-19 aftermath compounded by the recent unstable international situation, including Russia's invasion of Ukraine. Company B is responding to raw material price increases by reducing distribution stages when importing raw materials, but financial burdens are growing heavier.

The rise in raw material prices is causing management difficulties for our small and medium-sized enterprises (SMEs). Amid ongoing instability in raw material supply due to COVID-19, the war between Russia and Ukraine is also acting as a factor driving raw material price surges. Especially since most companies have not properly reflected the soaring raw material prices in their supply prices, many SMEs are bearing increasing financial burdens without having effective countermeasures.

Crude Oil Tank

◆‘Skyrocketing’ Raw Material Prices=According to the Ministry of Trade, Industry and Energy's raw material price information on the 8th, as of the 7th, Dubai crude oil rose 15.02% compared to the previous day. Liquefied natural gas increased 27.35% compared to the previous month, and coal for power generation surged 35.80% compared to the previous week. Additionally, nickel, coking coal for steelmaking, iron ore, electrolytic copper, and aluminum prices rose by 44.28%, 5.18%, 6.79%, 2.52%, and 3.47% respectively compared to the previous day. Due to sanctions on Russia's economy, uncertainty in international energy prices such as natural gas and crude oil is increasing, and supply disruptions are occurring for rare items like neon, krypton, and xenon, which have a high import ratio from Ukraine in semiconductor processes.

These raw material price increases are directly impacting the management burden of SMEs. According to a survey by the Korea Federation of SMEs (Kbiz) conducted in January on business difficulties, 43.5% of companies cited ‘raw material price increases’ as a problem. In a survey by Kbiz at the end of last year, 53.4% of SMEs reported worsened financial conditions due to ‘raw material and parts price increases,’ a significant rise from 29.2% the previous year. This indicates considerable damage to SMEs caused by raw material price hikes due to global supply chain issues.

◆Unable to Raise Supply Prices=The problem is that while raw material prices fluctuate wildly due to rapidly changing international situations, SMEs supplying to large corporations cannot reflect these increases in their prices due to concerns about losing business. According to last year's Kbiz survey, regarding the reflection of raw material price increases in supply prices, 43.0% responded ‘not at all,’ and 43.2% said ‘only partially reflected.’ This means 86% of companies are not properly reflecting price changes in their supply prices.

The government has set a policy to provide consulting so that companies experiencing cost increases due to raw material price hikes can use the supply price adjustment system, but the industry explains that it is realistically difficult to reflect price increases through this system. SMEs are caught between rising raw material costs and unreflected supply prices, enduring financial difficulties. This is why calls for the urgent introduction of a supply price linkage system that reflects raw material price increases in supply prices are growing louder. Choo Moon-gap, head of the Economic Policy Division at Kbiz, said, "Most SMEs supplying intermediate goods to large corporations are not properly reflecting raw material price increases in their supply prices," adding, "Policy support must back efforts to ensure raw material price increases are sufficiently reflected in supply prices."

Kang Sung-cheon, Vice Minister of the Ministry of SMEs and Startups, is delivering opening remarks at the Emergency Response Task Force meeting for SMEs regarding the Ukraine situation held at the Government Sejong Complex on the morning of the 7th.

◆"Measures Such as Supply Price Linkage System Must Be Established"=The structure where raw material price increases are not immediately reflected in supply prices can cause significant shocks across the SME sector. Inflation has worsened dramatically, with international oil prices soaring due to Russia's invasion of Ukraine. Hong Un-seon, deputy director of the Small and Medium Business Research Institute, said, "Additional measures such as a supply price linkage system are urgently needed," and warned, "If the situation prolongs beyond a month, all SMEs using petroleum will be affected."

Currently, export SMEs are experiencing immediate damage. Due to international financial sanctions on Russia, many companies are unable to receive export payments, and concerns about foreign exchange losses are emerging due to the ruble's sharp depreciation. The Ministry of SMEs and Startups reported that from the 2nd to the 7th, a total of 44 damage reports were received, with 70% related to non-payment issues. Sanctions on Russian banks, exclusion from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), and ruble depreciation are causing Russian buyers to delay or refuse payments, worsening cash flow.

As an example cited by the Ministry, Company C in the machinery sector was notified that payment was difficult because a Russian state bank and its subsidiary were designated as sanction targets while shipping contracted equipment to a Russian factory. Company D faces concerns over cash shortages as Russian buyers ordered machines to be shipped in March and late May, but payment has stopped. Exports from SMEs to Russia account for 2.8% (ranked 10th) of total exports.

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