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Strong US dollar hikes prices of raw materials for manufacturers
By Park Jae-hyuk
The rapid depreciation of the Korean currency against the U.S. dollar has sounded the alarm not only for importers here, but also exporters who have previously been regarded as beneficiaries of the weaker won, according to industry officials, Sunday.
Last Thursday, the local currency fell to the 1,300 won level against the dollar for the first time in nearly 13 years, heightening concerns throughout the economy. Although the won rose slightly the next day thanks to the presumable intervention of the authorities, analysts did not rule out the possibility of the Korean currency depreciating to the 1,350 won level in the short term, given that the U.S. Federal Reserve is set to raise its policy rate again next month.
Whenever the local currency weakened in the past, Korean exporters enjoyed the enhanced price competitiveness of their products in developed markets.
The country's transition to a higher value-added economy, however, has led its exporters to depend more on raw materials imported from other countries, making them also vulnerable to the recent fall of the won.
A quarterly survey conducted by the Korea International Trade Association showed that 84.9 percent of exporters picked the rise in raw material prices as one of difficulties they will likely face during the third quarter of this year.
In addition, the proportion of exporters choosing the foreign exchange rate's increased volatility as a potential difficulty rose to 32.7 percent, up 10 percentage points from the previous quarter, indicating that the weakening won will weigh further on exporters.
"Korea has been importing expensive raw materials since its transition to a higher value-added economy," said Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute.
According to the Korea Importers Association (Koima), 87 percent of the nation's imports are raw materials and capital goods for exporters, as consumer goods account for only 13 percent of the total imports.
"Following the increased exports of higher value-added products such as semiconductors, cars, mobile phones, petrochemical products and ships, the import of raw materials necessary for manufacturers has been more important," Koima Chairman Kim Byung-kwan said in a previous interview with The Korea Times.
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| Container ships are seen loaded with cargo at Busan Port, Tuesday. Yonhap |
The steeper depreciation of the Japanese yen has also offset the positive impact of the won's depreciation on Korean exporters, according to experts.
"Although the improved brand awareness and quality of Korean products have led the weaker yen to have had a limited impact on Korea's exports compared to the past, Korean manufacturers of cars, machinery and electronics are still in fierce competition with their Japanese rivals," the Korea Chamber of Commerce and Industry said in a recent report.
In order to minimize negative impacts, experts advised exporters to secure their essential raw materials in advance, seeking a currency hedging to eliminate their foreign exchange risk resulting from transactions in foreign currencies.
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