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| Trade minister Yeo Han-koo, second from left, is being briefed about the impact of Russia-Ukraine crisis on Korean firms at the Russia Desk of the Korea Strategic Trade Institute in Seoul, Thursday. Yonhap |
By Lee Kyung-min
Korean exporters are expected to see a significant drop in profitability, crippled by spiking oil and raw material prices amid the escalation of the Russia-Ukraine crisis, market watchers said Friday.
The sales increase by manufacturing, which accounts for over half of the country's exports, will hardly be good news, since higher production costs led by soaring commodity prices will mean sharper losses. This means that the more they sell, the steeper their profitability will fall.
Korea's key manufacturers ― encompassing the steel, petrochemical, chemical, automobile and transport industries ― rely heavily on coal-powered fuels, notably crude oil, a reason why sustained volatility in global oil prices will crimp exports and hamper the economic recovery from the COVID-19 pandemic.
U.S. President Joe Biden said Thursday (local time) that the country will impose export controls on Russia to curtail high-tech imports to Russia and sanction major Russian banks, in a move aimed at penalizing Russia for its military attack against Ukraine.
An immediate drop in local firms' corporate profits brought on by reduced exports to Russia will be limited, given that Russia is Korea's 12th-largest trading partner, accounting for just 1.6 percent, $9.98 billion (12 trillion won), of Korea's export total of $644.5 billion. Ukraine accounts for only 0.08 percent of Korea's exports.
Yet, sustained export curbs coupled with higher oil prices will sap vibrancy from Korea's exports, a major threat to the export-reliant economy with the highest oil dependence among OECD countries.
Bleaker outlook
According to data released on Feb. 22 by FnGuide, a financial information service provider, the first quarter sales estimates for 97 major Korean firms ― including Samsung Electronics, SK hynix, Hyundai Motor and POSCO ― totaled 348.82 trillion won, up 7.2 percent from 325.27 trillion won estimated early this year.
Estimates for operating profit, by contrast, slid to 44.82 trillion won, down 0.7 percent from 45.15 trillion won.
Central to the downward revision was spiking raw material prices brought on by the Ukraine crisis. Oil prices are expected to soar even further, led by the concerns over Russia attacking Ukraine materializing in the market.
Data from the New York Commercial Exchange (NYMEX) showed that the price of West Texas crude oil (WTI) March contract stood at $94.65, Friday (local time), an increase of over 50 percent from a year earlier. Dubai oil and Brent crude April contract also rose to $91.84 and $101.01, respectively.
The prices of minerals, a key material needed in battery manufacturing, also soared. Nickel rose 34 percent year-on-year, whereas lithium nearly tripled in value, followed by cobalt, which rose 42 percent, bituminous coal (23 percent) and aluminum (34 percent).
Manufacturing-centered Korean exports will see their profitability dive in the months to come, Seoul National University economics professor Lee In-ho said.
"Korea, where not a single drop of crude oil is produced, must look to oil producers for industrial use and energy sources," he said. "The supply and price shocks of crude oil will continue to trouble Korea's leading industries as the Russia-Ukraine war drags on."
Cheong Wa Dae is also closely monitoring the situation in Ukraine. "President Moon Jae-in called for preemptive measures to minimize the impact of Russia's invasion of Ukraine through the emergency task force that has been in operation," Cheong Wa Dae spokesperson Park Kyung-mee said Friday.
