Crude price likely to continue upward surge throughout summer

By Kim Hyun-bin

Surging crude oil prices have been pushing many domestic industries to the edge as the cost per barrel has exceeded $90, chipping away at their bottom lines, according to industry analysts and company officials Monday.

Analysts added that oil prices will continue to climb in the coming months, forcing Korean Air, Lotte Chemical and many other companies to take emergency steps to absorb soaring raw materials costs. Industries that are directly affected include airline, maritime shipping and petrochemical companies among others.

According to the International Air Transport Association (IATA), the price of jet fuel as of the end of last month was $105.7 per barrel. It surged 27.3 percent from a month ago and from $83 (89 percent) from the year before.

Jet fuel accounts for 20 percent to 30 percent of domestic airlines' fixed costs. As oil prices rise, so do jet fuel prices. In the case of Korean Air, a loss of 30 million dollars occurs when the jet fuel price rises by one dollar per barrel. As the price of Dubai oil, which is the standard for crude oil imported into Korea, broke the $90 mark for the first time in seven years, the high price of jet fuel is expected to continue.

Although airlines are responding to the surge in oil prices by hedging the purchase of jet fuel in advance when oil prices are low, profitability deterioration is inevitable in a situation where high oil prices are prolonged.

"In the case of Korean Air, they make deals with an option to purchase an additional 30 percent at the initial set price of the purchase. So they are capable of managing the high oil price but if the situation is prolonged it will become a burden on consumers who will have to pay increased fuel surcharges," an industry official familiar with the matter said.

The officials believe the resumption of international passenger demand is urgent, but resuming routes prematurely could cause even greater losses. Korean Air, which posted a record 1.46 trillion won in operating profit last year backed by strong cargo sales, plans to respond to the surge in oil prices this year by cutting fixed expenses.

The shipping industry also feels the pressure of rising costs. As of 2020, the amount of fuel used by HMM, the largest container shipping company in Korea, accounted for 500 billion won. As oil prices continued to rise, the cost rose to 680 billion won in the third quarter of last year.

"If oil prices rise for a long period of time, the cost burden will increase. We will continue to monitor the situation closely and respond accordingly," an HMM official said.

The petrochemical industry is also gritting its teeth. This is because the price of naphtha, a basic raw material for petrochemical products, has risen due to the rise in oil prices. Naphtha, which is the core substance for developing petrochemicals and is refined from crude oil. When the naphtha price rises, the price of basic emulsified products such as ethylene and propylene must also rise to ensure profit.

Lotte Chemical is considering a plan to increase the use of liquefied petroleum gas (LPG) instead of naphtha as a raw material for ethylene plants in Yeosu and Daesan, South Jeolla Province. LPG prices are 80 percent to 90 percent of naphtha.

Analysts expect crude oil prices to continue to rise in the first half of the year.

"Oil prices are close to the high resistance based on the WTI standard, so a technical rebound is possible in the middle of this month, but it is expected to continue the upward trend again until the summer of this year," Byun Jun-ho analyst at Heungkuk Securities said.