Analysts say that the business environment of companies next year is facing a clock-based situation with three major risks: raw materials, supply chains, and exchange rates. The price of steel scrap, a raw material for steel sheets, also exceeded 600,000 won per ton for the first time in 13 years last month. Imported scrap is piled up at Dongkuk Steel’s Incheon plant. / Reporter Huh Moon-chan
It was predicted to some extent that interest rates would rise in the era of with Corona (step-by-step recovery of daily life). The Bank of Korea has stated that it is necessary to normalize the base rate of 0.5% per annum, which is virtually zero, in line with the economic recovery from the first half of the year. However, there were not many experts who predicted a situation in which prices rose and even the exchange rate rose. Market interest rates are also jumping out of the BOK’s forecast range. There is growing concern that the so-called ‘new third high’, such as unexpectedly high inflation, high interest rates, and high exchange rates, will hamper the economy.
The Bank of Korea (BOK) plans to raise its forecast for consumer price inflation this year from 2.1% to 2.2% to 2.3% in its economic outlook report on the 25th. This significantly exceeds the BOK’s target of 2% and is the highest level since 2011 (4.0%). The rise in inflation is largely due to the fact that international oil and raw material prices are skyrocketing as demand increases due to Corona. In addition to supply chain problems, global food prices, semiconductors, and various freight rates soared.
The prevailing view is that the BOK will raise the key interest rate once on the 25th and once in January of next year to keep up with the rising inflation. By January next year, the Bank of Korea’s base rate is expected to be 1.25% per annum. The market has already reflected this expectation. The yield on the 3-year government bond rose 0.052 percentage points on the 22nd to record 2.018% per annum. On the 1st, it was 2.108% per annum, the highest since August 3, 2018 (2.108% per year).
The won-dollar exchange rate approached the ‘1 dollar = 1,200 won’ line, which is considered a sign of a crisis. The exchange rate closed at 1,185 won and 10 per dollar, down 20 days ago, but on the 12th of last month it soared to 1,198 won and 80, the highest of the year. It greatly exceeds the level of the average exchange rate in the fourth quarter of 2019 (1,175 won, 57 before), just before Corona 19.
Companies facing the new 3rd high school are in an emergency situation. “The cost burden is increasing due to the rise in raw material prices such as iron ore, aluminum and copper,” said an automaker official.
Next year’s business ‘Zero Clock’… Prepare with emergency plans for each situation
Preemptive measures against prolonged increases in raw material and logistics costs such as electronics and shipbuilding
Domestic conglomerates selected the ‘3C’ as the management risk to prepare for next year. These are cost increases due to increases in raw material prices and logistics costs, supply chain risks identified in the semiconductor and urea crisis, and currency volatility due to changes in each country’s monetary policy.
Until this year, the consumer sentiment suppressed by the COVID-19 crisis has benefited from the explosion of ‘pent-up consumption’, but the fact that even this is waning is also a worrying factor. It is for this reason that companies emphasize preemptive measures according to the ‘Contentency Plan’ when making business plans for next year. An executive in charge of management planning of the four major groups said, “According to how flexibly and proactively you respond to unexpected situations, your performance as well as the survival of your company can change.”
○ Raw materials and logistics costs ↑… adverse effect on profitability
According to the industry on the 22nd, home appliance businesses such as Samsung Electronics and LG Electronics are having a hard time defending their earnings due to the recent increase in logistics costs. LG Electronics said in a 3Q earnings briefing held last month that the increase in logistics costs was the main reason for the deterioration of profitability in the home appliance (H&A) sector. LG Electronics explained, “Sea and air freight rates are at an all-time high.
Soaring raw material prices are also adversely affecting profitability. This year, the sharp rise in the price of core raw materials such as iron ore, aluminum, and copper is reflected in the manufacturing cost through steel plates and various equipment, which is deteriorating the company’s performance. Korea Shipbuilding & Marine Engineering (DSME) Daewoo Shipbuilding & Marine Engineering (SHI) and other major domestic shipbuilders suffered an operating loss of 1 trillion won each in the first half of this year alone due to provisioning for a surge in heavy plate prices this year.
○ Supply chain management emergency
Supply chain risks from China are also a threat that can paralyze production sites at any time. Regardless of the industry, there are concerns that “all factories in Korea will be shut down if China locks down suppliers.”
According to the ‘Analysis of Supply Chain Vulnerability and Ripple Routes of Korean Industries’ report recently released by the Korea Institute for Industrial Economics and Trade, the ‘items of interest’ that Korea has a trade deficit with and whose dependence on imports from China is more than 50% include urea, silicon, lithium, and magnesium. A total of 1,088 each year. Of these, 653 were ‘vulnerable items’, which depended on imports for more than 70%. The report analyzed that if there is a problem in the supply and demand of lithium and magnesium, secondary related industries such as automobiles, chemicals, secondary batteries, and semiconductors will be affected.
In particular, lithium hydroxide, a core material for secondary batteries, is 83.5% dependent on Chinese products. This is the reason for the analysis that China is holding the leash of the world’s top 10 car battery companies such as LG Energy Solution, SK On, and Samsung SDI. China also accounts for 85% of the world’s supply of magnesium, which is essential for the manufacture of electric vehicles. Even if automakers do not directly purchase, there are concerns that automobile production lines can be established through subcontractors such as electronics manufacturers. The semiconductor industry, which accounts for 15% of Korea’s exports, is also nervous. This is because if China bans the export of raw materials in response to the US check, sparks could be set in South Korea.
○ “Creating a flexible organization in a crisis situation”
The exchange rate is a variable that directly affects the profitability of a company due to the nature of the ‘small open economy’ structure, which is 80% dependent on external factors. “The tapering of the US central bank (reduction in asset purchases) is making it more difficult to predict the exchange rate,” said a finance executive at a large corporation. Normally, the business plan for next year should be finalized at the end of November, but the US is expected to decide whether to adjust the tapering speed in the next month.
In particular, airlines that are sensitive to oil prices and exchange rates are nervous. Because aircraft lease payments and jet fuel payments are made in dollars, losses will inevitably increase if the dollar continues to strengthen. Korean Air, which uses 30 million barrels of jet fuel per year, loses $30 million (about 35 billion won) if oil price rises by $1 per barrel. An airline industry official said, “We are even considering selling the idle property in extreme circumstances.”
An increase in interest rates is also a variable that increases a company’s financing costs. The investment industry analyzed that a 1 percentage point increase in the interest rate would cause a loss of 74.4 billion won to Hyundai Motor Company. A high-ranking official from an economic group said, “Most companies see the business environment next year as a more unpredictable ‘zero clock’ situation than in 2019, which was hit by COVID-19. There is no other sharp alternative,” he said.
Reporters Kim Ik-hwan / Park Shin-young / Do Byeong-wook / Kang Kyung-min lovepen@hankyung.com
