Raw Material Prices Soar Amid Currency Fear... Importers 'Cry Out' Exporters 'Reluctant' (Comprehensive)

Lease and Aviation Fuel Purchases Paid in Dollars Hit Aviation Industry Hard
SMEs Dependent on Raw Material Imports Face Realized Poor Performance

Shipping Industry Receiving Dollar Freight Rates Faces Fuel Cost Impact Rather Than Benefits
Samsung Electronics: "Cannot Say It's Unconditionally Positive"

Need to Revise Second Half Strategy... Endless Crisis

[Asia Economy Reporters Oh Hyung-gil, Kim Jong-hwa, Kim Yuri, Lee Kwan-joo] A paint company in Busan has recently been put on high alert as the won-dollar exchange rate soars. Most of their raw materials are imported and must be paid for in dollars. Although they have been stockpiling supplies such as resin, pigments, and solvents since the end of last year in anticipation of the rising exchange rate, their inventory is about to run out soon.

A company official said, "We still have some raw material stock secured, but if this situation prolongs, we will be hit hard," adding, "We raised product prices twice last year and once this year, so it is difficult to reflect the recent sharp rise in the exchange rate."

As the exchange rate surges, the industrial sector is gripped by fear. Companies that have been struggling with supply chain instability and soaring raw material prices since the beginning of this year were shocked when the won-dollar exchange rate surpassed 1,300 won for the first time in 13 years.

In particular, small and medium-sized enterprises (SMEs) that import raw materials from overseas to manufacture parts domestically, and the aviation industry that pays aircraft leasing fees and fuel costs in dollars, are in a state of emergency. The crisis has grown to the extent that they need to revise their management plans for the second half of the year, but the problem is the uncertainty about how long this situation will last, which is increasing anxiety.

[Image source=Yonhap News]

◆ High interest rates, inflation, and exchange rates breaking ceilings... Companies scream = The aviation industry is a representative sector hit hard when the exchange rate rises. Since both long-term aircraft lease costs and jet fuel purchase costs are paid in dollars, a rise in the exchange rate delivers a direct blow. Korean Air and Asiana Airlines incur foreign exchange losses of 41 billion won and 28.4 billion won respectively for every 10 won increase in the exchange rate.

Especially amid high oil prices, the additional blow of a high exchange rate is pushing cost burdens through the roof. Airlines have already spent a significant amount on fuel. The fuel expenses of five airlines in the first quarter alone exceeded 1 trillion won.

Professor Hwang Yong-sik of Sejong University explained, "(Since dollar payment costs) are reflected in prices, airfares inevitably rise," adding, "Low-cost carriers (LCCs), which often operate aircraft through leasing, will face a significant burden."

The poor performance of SMEs and mid-sized companies that rely heavily on imported raw materials is also becoming a reality. Structurally vulnerable to external shocks, these companies are restless. Although the situation varies slightly by industry, those heavily dependent on imported raw materials are experiencing actual performance declines. They appeal that the current heightened uncertainty is dangerously precarious.

The cement industry, which is struggling with soaring thermal coal prices, finds it difficult to expect any positive effect from the exchange rate. Inland cement companies that do not export and rely solely on domestic demand are in the worst condition.

A cement company official said, "When the won depreciates, companies with coastal factories can partially offset profits and losses through exports, but inland companies suffer severe damage," adding, "They are facing a double burden of soaring thermal coal prices and a sharp rise in the exchange rate, but there is no clear countermeasure."

The duty-free industry, which handles duty-free goods sold in dollars, also expresses great concern. The industry shares a common voice that the exchange rate issue is a significant burden amid the gap between endemic expectations and actual performance recovery.

There are concerns that a high exchange rate could become a factor in product price increases. In the food industry, the cost of imported raw and subsidiary materials has risen sharply, causing distress. The increased prices of packaging materials, transportation, and labor costs have compounded the industry's cost burden, raising the possibility that these will be offset by product price hikes.

To cope with rising costs, most major domestic food ingredient and processing companies began passing on part of the costs through price increases starting last year. However, as the prices of raw and subsidiary materials have risen so rapidly and steeply, it has become difficult to offset these costs by price increases alone.

The pharmaceutical industry, which imports, produces, and distributes raw materials or finished drugs to a considerable extent, may also see exchange rate increases directly leading to cost hikes. The over-the-counter (OTC) drug market, where medicines can be purchased at pharmacies without a doctor's prescription, is also at risk. Currently, retail prices of OTC drugs are autonomously set by each pharmacy, but if supply prices rise, pharmacies will have no choice but to raise selling prices, likely resulting in actual drug price increases.

Professor Kim Jung-sik of Yonsei University warned, "Currently, we are in a complex crisis phase where financial insolvency and real economic recession can occur simultaneously," adding, "As interest rates rise, household debt becomes insolvent, and if the real estate bubble bursts, consumption and investment in the real economy could shrink."

[Image source=Yonhap News]

◆ ‘Export companies benefiting from high exchange rates’ is a thing of the past = Traditionally, when the exchange rate rises, domestic companies focused on exports enjoyed a 'foreign exchange special' with increased sales. However, the recent global economic instability and soaring raw material prices are offsetting this benefit, according to general assessments.

Most domestically produced semiconductors are exported, so the semiconductor industry is considered a beneficiary of the exchange rate. However, the situation varies by company. For Samsung Electronics, considering not only semiconductors but also home appliances and smartphones, the rise in the exchange rate cannot be said to be entirely positive for performance. The set business divisions (MX, CE) are negatively affected by exchange rate increases, unlike semiconductors.

The shipbuilding industry, which receives payment in dollars for shipbuilding contracts, is not entirely pleased with a high exchange rate. Since exchange rate fluctuations during the contract period directly affect won-denominated sales, sales increase in proportion to exchange rate fluctuations. However, the shipbuilding industry stated, "With growing concerns about a global economic downturn, it is difficult to talk about benefits based solely on the exchange rate as an economic indicator."

Professor Lee Jung-hee of Chung-Ang University diagnosed, "Since many industries process raw materials, export unit prices inevitably rise, which could weaken the price competitiveness of our industries," adding, "The problem is that the conventional notion that exchange rate increases are positive for export companies may be broken." He further predicted, "Given the currently very high raw material prices, exchange rate increases are likely to act as an additional burden."

[Image source=Yonhap News]

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