Losing money on each sale, Korean companies cut back

Industry

Published: 28 Jun. 2022, 19:13

Losing money on each sale, Korean companies cut back

The price of Haepyo canola oil and pressed olive oil will increase by up to 20.8 percent from next month. Ottogi also recently raised the price of commercial cooking oil by 20 percent. Cooking oil, such as canola oil and olive oilm are on display at a large mart in Seoul on Tuesday. [YONHAP]

A lighting manufacturing company is losing money on each sale after raw material prices jumped 60 percent.

"As we can't raise the price on our products at the rate raw material prices have increased, we face huge losses with the more orders we get," the owner of the manufacturing company said. "I'm considering downsizing our factory as raw material prices will likely rise for a long time."

A new survey by the Bank of Korea found that four out of every 10 companies said this year raw material prices have risen by more than 20 percent compared to last year.

Two out of every 10 companies said they are considering changes to employment or reducing new business investments in response to inflation.

Concerns about stagflation — economic slowdown coupled with inflation — are abound.

The central bank's survey, published on Monday, involved 570 companies around the country and was conducted between May 12 and June 2. A total of 350 companies responded.

Among those answering, 122 were large corporation.

Of the responding companies, 40.1 percent said that their raw material prices increased by 20 percent or more compared to last year. Some 8 percent said raw material prices increased more than 50 percent.

Of the construction companies in the survey, 60.7 percent said raw material prices rose at least 20 percent.

Consumer prices will continue to rise in the second half, according to 86 percent of those surveyed, with 94.8 percent of construction companies anticipating continued inflation and 88.6 percent of service companies.

Nearly 70 percent of the companies said they have raised the prices of their goods and services due to the rise in raw material prices. Even among those that still haven't raised their prices, 53 percent said they plan to do so this year.

But none of the respondents said they have raised their prices as much as the prices of raw materials have increased.

Two-thirds of the respondents said the Ukraine crisis was the No. 1 driver of price increases, 36.1 percent blamed logistics costs and 18.2 cited import delays.

Nearly 60 percent said they expect the Ukraine crisis to continue to affect raw material prices until the end of this year, while 40.3 percent saw it affecting prices through next year.

The inflation shock has led to companies cutting back on hiring and on new investment, with 22.7 percent saying they are planning to make staffing adjustments. Of the service companies responding, 32 percent said they would adjust employment plans.

"We are at the beginning of a vicious cycle where wages are being raised in response to inflation and then this increase in wages leads to an increase in prices," said Kim Jung-sik, professor emeritus, economics, Yonsei University. "There's a strong possibility that the service industry could reduce employment if profitability fails to keep up with wage increase."

The biggest concern is decelerating economic growth followed by inflation. Supply chain disruptions, geopolitical risk and interest rates trailed behind.

"In addition to raising interest rates in controlling consumer price increases, we have to found ways that would lower the cost of business, including tax cuts and labor market reforms," said Sung Tae-yoon, professor of economics at Yonsei University.

BY AHN HYO-SUNG [lim.jeongwon@joongang.co.kr]