[Exchange Rate Hits Ceiling] Oil Refining and Aviation in Crisis... Imported Raw Materials '↑' Export Profitability '↓'

Petrochemical Industry Faces Refining Margin Decline... Difficult to Maintain Profits in Second Half
Airline Industry Burdened by Aircraft Lease Costs
Currency Beneficiary Companies Also Negatively Impacted... Rising Raw Material Costs

[Asia Economy Reporters Hyunseok Yoo, Donghoon Jung, Yuri Kim] The won-dollar exchange rate has hit its highest level in 13 years and 4 months, putting the industrial sector on high alert once again. The combination of high inflation, high interest rates, and a strong dollar has created a ‘trap’ for companies with a large import ratio or industries sensitive to exchange rates. In particular, companies that mainly produce intermediate goods are inevitably facing profitability deterioration due to rising production costs caused by the surge in raw material import expenses following the exchange rate increase. Not only is export profitability worsening, but corporate concerns about price instability are also growing, yet finding a solution remains difficult.

◆ Exchange Rate Shock... Direct Hits to Refining, Aviation, and Duty-Free Industries = On the 23rd, the won-dollar exchange rate opened at 1,341.8 won, up 2.0 won from the previous day’s closing price, and as of 10:30 a.m., it stood at 1,338.80 won. The won-dollar exchange rate surpassed the 1,340 won mark during trading the previous day, marking the highest level in 13 years and 4 months.

The soaring dollar price has dealt a direct blow to airlines, which must pay lease fees and fuel costs in dollars, as well as to refining and steel industries that have a high proportion of raw material imports. In the refining industry, over 50% of sales costs are crude oil purchase expenses. About 70% of refined crude oil is exported, which partially offsets the burden. However, the sheer volume of imports is large, and with concerns over global demand contraction, refining margins are also on a downward trend, making it difficult to maintain profits in the second half of the year.

The steel industry is also facing increased cost burdens due to the rising dollar value amid falling product prices caused by weak demand. The petrochemical industry, which relies mostly on imported naphtha traded in dollars, is also concerned about profitability deterioration.

For airlines, which primarily pay aircraft lease fees and jet fuel in dollars, this is a major negative factor. Although jet fuel prices have fallen recently with the drop in crude oil prices, the rising exchange rate has nullified any benefits. Korean Air is estimated to incur about 35 billion won in foreign exchange losses for every 10 won increase in the exchange rate, while Asiana Airlines faces about 28.4 billion won in losses.

Concerns about a decline in overseas travel demand are also growing. With the resurgence of COVID-19 and the burden of increased airfares due to fuel surcharges, the rising exchange rate could further increase consumer costs. According to the duty-free industry, monthly sales at domestic duty-free shops during the peak summer vacation months of July and August were between 1.3 trillion and 1.5 trillion won, failing to break out of the ‘COVID box range’ of 1 trillion to 1.5 trillion won seen since the pandemic began.

According to the Korea Duty Free Association, domestic duty-free sales in June, when overseas travel resumed amid reopening expectations and an endemic atmosphere, amounted to only 1.4615 trillion won. Considering that the number of domestic and international customers increased from 500,000-600,000 at the beginning of the year to 948,287 in June, the average spending per customer actually decreased. An aviation industry official said, "The rise in the won-dollar exchange rate leads to increased travel costs, which dampens passenger demand," adding, "Costs paid in dollars, such as fuel and interest, increase, creating a double burden for airlines."

◆ Rising Import Raw Material Prices ‘↑’ Export Profitability ‘↓’ = In the market, there are also forecasts that the conventional formula of exchange rate increases benefiting export companies will not hold true. Typically, when the exchange rate rises, the won depreciates, enhancing the price competitiveness of Korean exports and increasing sales revenue in won terms. However, recently, as domestic companies have built factories overseas to increase production and sales, they are less affected by exchange rates. Moreover, the sharp rise in raw material prices has increased cost burdens, worsening profitability, and the negative effects are greater.

The problem is that inflationary pressures triggered by COVID-19, the Russia-Ukraine war, and now the added challenge of a high exchange rate could adversely affect the overall Korean economy. The Korea International Trade Association recently reported, "Changes in raw material prices and won exchange rates affect the Korean economy through various channels such as production costs and trade," and projected that "based on current price fluctuations compared to last year’s average, domestic companies’ production costs will rise by 8.8% across all industries."

Corporate worries are deepening. According to a recent survey by the Federation of Korean Industries targeting the top 1,000 companies by sales, the appropriate won-dollar exchange rate level for securing export profitability in the second half of this year was found to be 1,206.1 won. If the high exchange rate persists, export profitability, which refers to the level of profit companies earn through exports, could deteriorate further.

If the exchange rate continues to rise, there are also concerns about an expanding trade deficit. The trade balance recorded deficits of -2.4 billion dollars in April, -1.6 billion dollars in May, -2.5 billion dollars in June, and -4.8 billion dollars in July. From the 1st to the 20th of this month, a deficit of 10.2 billion dollars was recorded, raising the possibility of a fifth consecutive month of deficit. The Korea International Trade Association analyzed that when international oil prices and the won-dollar exchange rate each rise by 10%, Korea’s export value increases by 0.03%, while imports increase by 3.6%, indicating a high likelihood of an expanding trade deficit.

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