Low oil prices dragging down a range of sectors
In a rapid reversal of fortunes, however, the top shipbuilder decided to temporarily shut down the plant in Ulsan last week, hit by a dearth of new orders amid record low oil prices.
The decision was the latest manifestation of the dire situation facing some key Korean industries heavily dependent on the contracts from oil-producing countries.
“The prolonged slump in oil prices has prompted Middle East countries like Saudi Arabia to pare back spending and put infrastructure projects on hold,” said Cho Gyu-rim, a senior researcher at Hyundai Research Institute.
“The move deals a huge blow to industries such as shipbuilding and the construction sector given that many large contracts are signed with those countries.”
Oil rose above $30 a barrel temporarily in the biggest relief rally in three months on Friday. Despite the rally, the $30 range is a historical low, given that the prices hovered around $100 two years ago. And oil prices could conceivably go lower.
An old rule of thumb is that falling oil prices help boost economic growth in non-oil exporters like Korea because consumers have extra money in their pockets thanks to the savings from cheaper oil prices.
While the effect on consumer confidence or retail sales is unclear, the steep decline in crude prices has been nothing but bad news to key industrial companies like HHI and Daewoo Shipbuilding & Marine Engineering.
The volume of orders for overseas projects totaled $41 billion as of early December, down 31.3 percent from a year earlier, according to the International Contractors Association of Korea. Overseas projects include construction, offshore plants and shipbuilding. Orders from the Middle East decreased by 52 percent to $14.7 billion last year. That figure is the lowest since 2006.
Korea’s top three shipbuilders - Daewoo Shipbuilding & Marine Engineering, HHI and Samsung Heavy Industries - are projected to report a combined loss of nearly 10 trillion won in 2015.
The companies have reported delays and cancellations of projects since the end of last year.
In broader terms, low oil prices will likely take a toll on other Korean exports as cost cutting and cancellations of big infrastructure projects will impact orders for steel and other materials.
Exports hit $22.28 billion in the first 20 days of this month, down 8.9 percent compared to the same period last year, according to Korea Customs Service data. The pace of the decline is already faster than last year, when the nation’s monthly exports declined an average 7.4 percent.
Plunging oil prices are also negatively affecting Korean financial markets, accelerating foreign capital outflows as oil producing countries reel back liquidity from overseas.
Foreigners net sold Korean stocks worth 150 billion won on Friday for the 35th consecutive day, according to the Korea Exchange.
Saudi Arabia was the largest seller of Korean stocks in December, offloading stocks worth 773 billion won, according to the Financial Supervisory Service (FSS) on Thursday. The sell-off from Saudi Arabia accounted for almost 12.7 percent of total selling by foreigners.
When counting other oil producers such as Canada and Norway, the pullout by oil producers becomes even higher.
Those three countries sold Korean stock worth 8.4 trillion won from May through December, accounting for 69 percent of total foreign offloading during the same period.
“Declining crude prices have put downside pressure on the Korean stock market,” Kim Young-hwan, an analyst at Shinhan Investment Corporation, said. “It’s bad overall for global financial markets.”
Kim forecast that the pace of Middle East oil money’s outflow from the Korean stock market will slow this year, saying they already pulled out a great deal.
Saudi Arabia withdrew 31 percent of its investments in Korea’s market while it withdrew about 13.2 percent of its investments in the rest of the world, he said.
Global oil markets are expected to remain oversupplied this year as Iran is poised to return to oil markets with the lifting of sanctions, the International Energy Agency said.
Iran said earlier this month that it was ready to add half a million barrels a day to crude exports just hours after international sanctions were lifted. A flood of new oil from Iran will likely push them even lower.
Diplomatic tensions between Iran and Saudi Arabia have made the situation even more complicated. Saudi Arabia is a major oil-producing country and de-facto OPEC leader, but the two countries are highly unlikely to cooperate on oil supplies with such bitterly deteriorating relations.
A rising number of analysts predicts that oil prices could dip to the $20 per barrel level.
Goldman Sachs Group gave a 50 percent chance of oil falling to $20 in September and Morgan Stanley said that a strong dollar could push oil below $30, according to Bloomberg.
“It’s hard to say how far oil prices will decrease,” said Cho of Hyundai Research Institute.
“I think average oil prices for 2016 will stay in the mid-$30 range.”
BY PARK EUN-JEE, KIM JI-YOON [firstname.lastname@example.org]