Japan quake feared to fuel S. Korean inflation

Japan's massive earthquake and tsunami could fuel South Korea's inflationary pressure due to higher prices for oil, gas and steel products, officials and industry sources said Monday.

Sources at the finance, knowledge economy and farm ministries, and private investment companies said the quake and subsequent tsunami that struck the northeastern part of Honshu, the main island of Japan, affected oil refineries and steel production in the region, which could translate into high prices for manufactured goods.

The halt in power production of 10 of the island nation's 50 nuclear reactors could also raise international demand for natural gas, coal and crude oil down the road, posing challenges for Seoul.

Japan is already the third-largest consumer of crude oil, accounting for 5.2 percent of global demand, and is the largest importer of liquefied natural gas (LNG).

South Korea's consumer price index surged 4.5 percent last month from a year earlier in February, marking the sharpest growth tallied since November 2008. The figure is much higher than the government's 2011 inflation target of 3 percent.

"Because the hardest-hit Tohoku region is home to 30 percent of Japan's oil refinery facilities, there is a chance that gasoline, diesel and other petroleum product costs may go up in the coming months as output is cut," a government official said.

Japanese refiners produce 3.2 million barrels of petroleum products per day and export 500,000 barrels. A drop in exports can affect international prices.

Since two reactors at the power plant in Fukushima have experienced serious damage and will have to be dismantled, Tokyo's reliance on its thermal power plants that burn LNG and other fossil fuel is expected to go up, he said.

Such a development can have a direct impact on South Korea's city gas, district heating and electricity prices, all things the government wants to keep down to stem consumer price hikes, the official added.

In addition to the energy sector, officials said that low reserves of corn, beans and other grain in Japan could trigger a spike in food prices, which could further exacerbate problems for South Korea.

Recent hikes in local consumer prices have largely been attributed in part to the spike in international grain prices.
Another area that has already been affected is in fisheries goods, since the country imports all of its fresh pollack from Japanese
waters.

"Prices of pollack have surged 26 percent on the local market compared to last week," a farm ministry official said.
Despite such concerns, others said that it is too early to say what fallout may occur.

"Since some Japanese production facilities have been turned off, there is going to be an immediate drop in demand while they are being fixed that can translate into a drop in energy fossil fuel prices in the near future," the knowledge economy ministry said.

Because many LNG shipments are delivered under a long-term contract arrangement, there should be no immediate price changes that can fuel inflation, it added. [Yonhap]