Either this or the other … Businesses are crying out for insane exchange rates

‘High exchange rate = good exports’ is a thing of the past
Loss of impact due to sudden increase in raw material prices
Airline losses with high foreign currency debt surge
Chemical, steel and battery industries are also struggling

KOSPI 2300 crash Companies are going through a tunnel of ‘zero clock’ due to high interest rates and exchange rates. An employee checks the indicators at the Kookmin Bank Dealing Room in Yeouido, Seoul on the 23rd, when the 40-day won-dollar exchange rate fell to 1,409 won 30, and the KOSPI index fell 1.81% to 2290.00. Reporter Kim Beom-jun

As the won-dollar exchange rate broke through 1,400 won, domestic companies were caught in a ‘third hand’ crisis of high exchange rates, high interest rates, and high prices. This is because the long-standing formula that exports increase when the exchange rate rises (depreciation of the currency earned) is now a thing of the past. In particular, this ‘exchange rate shock’ is accompanied by a contraction in demand and an economic downturn, which makes companies more anxious.

On the 23rd, the won-dollar exchange rate in the domestic foreign exchange market closed at 1,409 won 30, down 40 days from the previous day. Although he dipped slightly, he continued his high streak of 1,400 won for the second day. Because of the 1,400 won exchange rate, which came 13 years after the global financial crisis, companies that have to pay for raw materials in dollars make a ‘bad’ sound.

Battery companies that manufacture products by importing raw materials from abroad, chemical companies that import naphtha, a basic raw material for petrochemical products, and steel companies that import iron ore and coal are directly hit by the high exchange rate. The price of cathode materials bought by LG Energy Solutions, the world’s second-largest battery maker, was $42.37 per kg, about double last year ($21.81). The average price of naphtha imported by Lotte Chemical was $863 per ton, up 41.0% from last year ($612). From the second quarter, the exchange rate increased in the third quarter by 100 gained from the end of the previous quarter.

Companies with a lot of foreign currency debt suffer from a surge in interest rates and an increase in the exchange rate. An example is airlines. It is estimated that Korean Air and Asiana Airlines will lose about 350 billion won and 288 billion won in foreign currency valuation losses, respectively, if the exchange rate rises by 100 won. Asiana Airlines, which had a debt ratio of 6544.6% at the end of June, suffered a loss on foreign currency valuation of 416.3 billion earned in the first half of this year alone, more than double what was achieved in the first half of last year (198.3) . billion won). As foreign currency loans borrowed to import aircraft reached 4.86 trillion won at the end of June, interest costs are snowballing.

An official from a large corporation said, “It is not easy to transfer the increase in raw material prices to product prices as global demand has also decreased due to the economic slowdown.”

Korean Air and Asiana, if the exchange rate rises 100 won, only the valuation loss is 630 billion won per year
High raw material and logistics costs due to high exchange rates… Food, chemical, steel, etc. hit directly

The US central bank’s (Fed) increase in the benchmark interest rate and the resulting strong dollar is spilling over into domestic companies. As the cost of raw materials and logistics increases this year and the exchange rate increases, every company is alarmed and convenes an emergency response meeting to respond to the high exchange rate. The high exchange rate has been a factor that improves the competitiveness of export products, but the current high exchange rate is a sign of economic decline. There is growing concern that corporate profitability could decline significantly due to the sudden high interest rate and high exchange rate as soon as it leaves the low interest rate zone for a long period of time.

○ Busy preparing countermeasures against sudden fluctuations in the exchange rate

According to the business world on the 23rd, large companies are busy analyzing scenarios and preparing countermeasures according to the high exchange rate one after another. In particular, with the forecast that the exchange rate could rise to 1,500 won per dollar early next year, companies are struggling, saying they have to scrap all existing business plans and make some new.

An electronics industry official said, “The market is moving well beyond the exchange rate and interest figures originally expected. He sighed, saying, “Not to mention next year’s business plan, we are in a position to re-examine the plan for the fourth quarter, which starts a week later, from scratch.” An LG Energy Solution official said, “The volatility of the dollar is a bigger problem than the increase in the exchange rate. It is very difficult to draw up a stable business plan.”

In particular, there are many difficulties for companies that have to pay the price of raw materials in dollars. One of them is the food manufacturing industry, which imports raw materials such as wheat, oils and fats, and coffee beans from abroad and processes and sells them. There are many companies that delay buying raw materials and regret it because the exchange rate has been rising all the time. A food industry official said, “During the first half of the year, international grain prices jumped due to the war between Russia and Ukraine, and there was a delay in buying ingredients.

The airline industry, which has a lot of dollar debt for importing aircraft, is also a representative industry that suffers from high exchange rates. If the exchange rate rises 100 won, only Korea Air and Asiana Airlines will lose more than 600 billion won in foreign currency valuation. Asiana Airlines and low cost carriers (LCC), which operate mainly in Asian countries, are in a situation where interest rates are rising and high exchange rates are being ‘linked’ while traffic with China and other countries has not ‘to resolve adequately.

The steel industry, which buys iron ore and coal from abroad, and the oil refinery, which imports and refines crude oil, have also been hit hard. The price of iron ore imported by POSCO was $126 per ton in the second quarter, up 31.2% from last year’s fourth quarter ($96). As raw material prices fluctuate and the exchange rate increases, the cost of purchasing raw materials is very likely to rise further in 3Q.

○ “Next year’s topic is cost reduction”

Businesses agree that the strong dollar will not change easily. This is because the Fed has a strong will to control inflation, and there are many reasons why the dollar has no choice but to strengthen, such as the Russia-Ukraine war and the conflict between the United States and China. Kim Hyung-joo, a senior research fellow at the LG Business Research Institute, said, “The current high exchange rate is not due to a liquidity crisis as it was during the foreign exchange crisis or the financial crisis.

Companies benefiting from the sudden increase in the exchange rate are also not so bright. Automotive, shipbuilding and semiconductor industries with a high proportion of exports. In the second quarter, Hyundai Motor recorded 2.154 trillion won in sales and 641 billion won in operating profit as a result of exchange rate appreciation. However, a Hyundai Motor official said, “The biggest problem is that the car doesn’t sell regardless of how much money is paid in dollars. It is,” he feared. Sung-tae Jeong, a researcher at Samsung Securities, said, “In a situation where demand is shrinking due to the economic downturn, the sense of crisis caused by the general recession is greater than the direct exchange rate gains and losses .”

Companies protect against exchange rate risk in various ways, such as diversifying supply chains, diversifying payment currencies, and subscribing to derivatives. SPC Group announced that it is considering a plan to pay for raw materials imported from outside the United States, such as French butter and Australian wheat, in local currency instead of dollars.

Lee Sang-eun / Kang Kyung-min / Park Han-shin / Hankyung reporter selee@hankyung.com

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