Public Procurement Service Tightens Release of Materials... SMEs Face Double Burden of Declining Profitability

"With the unit purchase price of aluminum rising by nearly 30% compared to the beginning of this year, securing volumes has become difficult, making production itself challenging."

A, the CEO of an aluminum folding door manufacturer based in Paju, Gyeonggi Province, has been losing sleep recently due to concerns over raw material supply. According to the monthly non-ferrous metal price trends released by the Public Procurement Service, the spot price of aluminum traded on the London Metal Exchange (LME) last month was $3,585.0 per ton, up 13.5% from $3,157.5 in February. This is the result of several factors: key smelters in the Middle East, such as those in Qatar and Bahrain, which account for about 8-12% of global aluminum production, are cutting output due to the U.S.-Iran war; and there have also been supply disruptions at bauxite mines in Australia.

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However, starting from the 18th of last month, the Public Procurement Service reduced the weekly release limit for aluminum ingots (both Western and non-Western origins) for both general companies and cooperatives from the previous 400 tons to 320 tons, a 20% reduction. The release limit per company was also lowered: for general companies, the integrated limit dropped from 50 tons to 40 tons; for cooperatives, the limits for Western and non-Western ingots were reduced from 100 tons to 80 tons, respectively. The Public Procurement Service described this as a "temporary adjustment" to secure adequate inventory, but since no specific end date was announced, it is interpreted as an indefinite measure until supply and demand conditions stabilize.

Further adjustments have continued this month. From the 15th, the aluminum release limit multiplier applied to innovative and exporting companies was reduced from the previous three times to two times. With even preferential volume reduced, the overall supply capacity has become even more constrained. This supply reduction trend is not limited to aluminum. The Daejeon Regional Public Procurement Service recently announced that copper ingot inventory has been completely depleted, and sales will be suspended until additional stock arrives. Given that actual inventory for certain items has run out, this is a sign that the management of reserve materials is facing real difficulties. Regarding these measures, an official from the Public Procurement Service stated, "Only a very small portion of supply comes through the Strait of Hormuz, and since we source through various routes, there is no issue with securing supply." However, the official acknowledged, "Adjusting the release volume is indeed a response to the prolonged impact of the Middle East war."

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The real issue is that as both prices rise and it becomes harder to secure volumes, small and medium-sized manufacturers are likely to face a "double burden." With the Public Procurement Service now reducing even bulk purchase volumes for cooperatives, the avenues for securing raw materials have become more limited. Companies are now forced to procure raw materials on the open market at even higher prices, which is already eroding profitability. Kang Insu, a professor in the Department of Economics at Sookmyung Women’s University, explained, "While the government is adjusting the release of reserve materials according to supply and demand conditions, for now, there seems to be little room for (market) adjustment."

Companies complained that the burden of production costs is rising sharply due to both increased raw material prices and logistics costs. In response, on the 21st, the Public Procurement Service met with manufacturers and related cooperatives of aluminum windows, panels, railings, and median barriers, and introduced a plan to simplify the procedures for contract price adjustments in the event of price fluctuations through "guidelines for detailed contract price adjustments." Additionally, the agency plans to support companies by allowing contract price increases upon submission of supporting documents. Baek Hosung, Director General of the Procurement Business Bureau at the Public Procurement Service, stated, "In a situation where price volatility for raw materials is increasing due to instability in the Middle East, we will actively support companies to alleviate their burdens."

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