Squeeze is on as companies face higher costs, lower sales

Industry

Published: 09 Feb. 2022, 19:14 Updated: 09 Feb. 2022, 19:48

Squeeze is on as companies face higher costs, lower sales

Containers are stacked at the Gamman Container Terminal in Busan on Jan. 21. [YONHAP]

Falling sales and skyrocketing costs are putting the squeeze on Korean businesses both small and big.

Lee Young-woo, 76, runs a packaging company in Busan. The outlook is grim, Lee says, as orders fell by 30 percent since the pandemic outbreak while the price of cardboard jumped 46 percent over the past year. In December alone, sales fell 10 percent from the previous month.

“Even our remaining customers might stop using us if we raise prices, so we're just biting the bullet right now,” says Lee. “I was thinking about getting a loan, but I'm worried about the interest rate.”

Companies are growing anxious about rising costs on all fronts: materials, interest rates and foreign exchange to boot.

The Bank of Korea jacked up the base interest rate by 0.25 percentage point in January to curb inflation. A rise in the won-dollar rate is also a concern for manufacturers, as a weakening won means an increase in the import price of raw materials.

Petrochemical companies are feeling the pinch due to skyrocketing international crude oil prices. The West Texas Intermediate crude price hit $89.36 per barrel on Tuesday, up 47 percent from $60.64 on March 1, 2021.

The price of naphtha, a core material for petrochemical products, is rising but companies can't charge more in markets like China because demand is weak as governments try to discourage products that aren't good for the environment.

“The overall demand in petrochemical products decreased not only in China but also in other Asian regions including Vietnam and Malaysia,” said Baek Young-chan, an analyst at KB Securities. “Over-supply is also a concern considering that the U.S. and Chinese companies are planning to expand their production capacity.”

Baek forecast that the situation won’t get any better at least until the first half of 2022.

Shipping companies are carefully eyeing oil price fluctuations as well.

HMM, the largest container shipper in Korea, spent 500 billion won ($417.9 million) for fuel in 2020. In 2021, however, its fuel costs reached 681.4 billion won from January to September, up 36 percent compared to all of 2020. Fuel costs equaled seven percent of the company’s revenues (9.35 trillion won) during that same period.

Though higher shipping rates boosted shipping companies' revenues last year, industry analysts are worried that shipping rates might go down in the latter half of this year.

Steelmakers and shipbuilders are struggling over the price of steel plate, as iron ore, the main raw material for steel, became significantly more expensive in the last three months.

The price of iron ore imported from China reached $146.78 per ton on Feb. 4, up 60 percent from $55.32 last November. Steel plate accounts for some 20 percent of shipbuilding costs.

Major shipbuilders including Korea Shipbuilding & Offshore Engineering, Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries each posted operating losses of some 1 trillion won last year due to the price hike.

“The ships we are building right now were ordered a year or two ago, so we have no choice but to use more expensive steel exceeding our initial budgeting,” said a shipbuilding industry insider.

“If the exchange rate goes up, import prices will follow suit, negatively impacting our revenue and profit.”

Korean Air Lines' Boeing 787-8 lands at Incheon International Airpot on Oct 18, 2021. [YONHAP]

Airlines are taking a major hit from the rising crude prices, as oil accounts for some 25 percent of their operating expenses.

According to the International Air Transport Association, the price of jet fuel was $111.73 per barrel as of Feb. 4, a 73.7 percent increase year-on-year.

Korean Air spent 1.8 trillion won on jet fuel last year, which was a 44.3 percent jump from the previous year.

“Korean Air burns some 30 million barrels of fuel a year, so it costs us $30 million per every dollar increase,” said a spokesperson for Korean Air.

Analysts estimate that budget airline Jin Air will have to spend an additional 7.6 billion won in fuel costs annually, and T’way Air 6.9 billion won.

A rise in the won-dollar rate took a toll on airlines as well, since jet fuel costs and rental fees for leased aircraft are paid in dollars.

As central banks are getting hawkish on monetary policy in order to tame inflation, the hike in interest rates is adding pressure on all companies.

The Korea Economic Research Institute found on Dec. 15 that a 0.5 percentage point increase in the base rate and a 1.3 percentage point jump in the consumer price will lift interest rates on corporate loans by 0.95 percentage point.

Small and medium-sized businesses are particularly vulnerable, as they are more dependent on loans.

According to a report by the Industrial Bank of Korea’s Economic Research Institute published in January, the number of small and mid-sized businesses with impaired capital will go up by 0.63 percentage point when the base rate rises one percentage point. Capital impairment refers to when a company's capital becomes less than the par value of its capital stock.

The government should come up with measures to help companies stay afloat, experts argue.

“Companies have to improve productivity in the long term in order to adjust to the cost hikes but since there is no quick solution right now, the business environment will be harsh this year,” said Yang Joon-mo, an economics professor at Yonsei University.

“The government should do its part by securing energy supplies and maintaining the global supply chain through diplomacy.”

BY KIM KYOUNG-MI, LEE SU-JEONG, KANG KI-HEON [shin.hanee@joongang.co.kr]