[Inside the Industry] The Spicy Bite of Raw Materials That Troubled Nongshim

Q2 Sales Increased by 16.7% but Operating Profit Dropped by 75.4%
Price Hike Effects Expected After Q4

[Image source=Yonhap News]

[Asia Economy Reporter Lee Jung-yoon] Nongshim, the producer of the 'national ramen' Shin Ramyun, recorded sluggish performance in the second quarter of this year due to rising raw material prices caused by international geopolitical instability and inflation. Although sales increased, operating profit shrank due to rising costs. In response to this downturn, Nongshim announced a product price increase, which experts predict will have a positive effect on profit improvement starting from the fourth quarter.

According to the financial investment industry on the 25th, Nongshim's consolidated sales for the second quarter of this year increased by 16.7% year-on-year to 756.2 billion KRW, while operating profit decreased by 75.4% to 4.3 billion KRW. On a separate basis, sales increased by 15.6% compared to the same period last year, but the impact on operating profit was significant, turning into a loss with an operating loss of 3 billion KRW.

The sharp decline in Nongshim's operating profit was largely due to the rise in raw material prices such as wheat and palm oil following Russia's invasion of Ukraine. According to Nongshim's semi-annual report, the import price of wheat last year rose from $258 per metric ton (mt, 1000 kg) to $365 in the first half of this year. For palm oil imported from Kuala Lumpur, Malaysia, the price increased from $1,110 per metric ton last year to $1,554. The purchase amount of raw materials for ramen and snack production, including wheat flour, increased by about 26.5% year-on-year to 486.5 billion KRW in the first half, and the cost of sub-materials for ramen and snack production, including packaging materials, rose by 19.1% to 213.7 billion KRW.

However, with Nongshim's announcement of product price increases the day before, it is expected to overcome this poor performance. Nongshim decided to raise the shipment prices of major ramen and snack products by an average of 11.3% and 5.7%, respectively, starting from September 15. The ramen price increase comes about one year after the last increase in August of last year, and the snack price increase is the first in six months. Additionally, raw material prices have started to decline since June, which is expected to create synergy with the effect of these price increases.

Still, immediate performance improvement seems difficult. Jo Sang-hoon, a researcher at Shinhan Financial Investment, said, "Due to the 'legging' effect, which takes 3 to 6 months from acquiring raw materials to producing products, profit increases are expected to appear from the fourth quarter of this year or next year." He added, "When prices were raised in August last year, raw material prices were rising, so stock prices actually fell, but this time, prices are being raised when raw material prices are falling, so the effect on profit improvement is expected to be significant."

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