Soaring raw material costs, higher interest rates to curb business activities

By Kim Hyun-bin

Korean companies are expected to face growing uncertainties in the second half of this year, as soaring energy and raw material costs, coupled with higher interest rates and the won's falling value against the dollar, continue to weigh on production, consumption and investment, according to company officials.

In particular, energy demand will likely spike in the wake of the early summer heat wave, forcing Korea to import more oil and gas, which will further widen the nation's trade deficit, they said.

"There are aspects that are virtually uncontrollable regarding external variables surrounding our trade environment," said Moon Dong-min, head of the Trade and Investment Office at the Ministry of Trade, Industry and Energy.

Korea's trade deficit in the first half of this year exceeded $10 billion, the highest level recorded in the first half of any year.

According to the ministry, exports in the first half of the year increased by 15.6 percent to $350.3 billion, and imports increased by 26.2 percent to $360.6 billion. As a result, the trade balance recorded a deficit of $10.3 billion. This is the largest ever recorded in the first half of a year. The previous record of the largest trade deficit in the first half was $9.16 billion in 1997.

However, many experts believe the current external difficulties will continue through the second half of the year.

According to the results of a survey conducted by the Federation of Korean Industries (FKI) on 150 exporters, the surveyed companies largely predicted that exports will slow in the second half of the year and profitability will decrease further, citing factors such as rising raw material prices and logistics costs, supply chain difficulties and rising interest payments due to rate hikes.

In addition, in a survey conducted by the Korea International Trade Association (KITA) on 1,301 domestic exporters, it was found that exporting companies are under cost pressure overall, due to external circumstances including increased volatility of the won-dollar exchange rate.

KITA predicted that it would be difficult for the export economy to improve in the short term, claiming, "Uncertainties in the global economy will increase due to the prolonged Russia-Ukraine war, accelerating global inflation and the full-fledged U.S. interest rate hike."

Chey Tae-Won, chairman of the Korea Chamber of Commerce and Industry, said Korean companies are facing great difficulties in response to the global energy and raw material crisis that has been intensifying recently.

"Companies that consider carbon neutrality as a leap forward face burdens and uncertainties," Chey said. "In times like these, we need to find a solution together so that the efforts of climate response and energy transition are not halved."

Some scholars point out that the country's electricity bills are too expensive compared to other advanced countries, and many urge the government to reduce the rates to lessen the burden on corporations.

"Korea's residential electricity rate placed 36th among 37 OECD member countries, and industrial electricity rates ranked 22 among 37 OECD nations," Park Joo-heon of Dongduk Women's University said.

Major conglomerates are also searching for alternative options to secure raw materials, especially in the battery sector, as raw material prices play a crucial role in a company's profitability.

"There isn't much a company can do. The only options we have are to diversify our suppliers and aim for better price negotiation with clients," a major battery company official said.

LG Energy Solution (LGES) is expanding its lithium and nickel supply to the U.S., Germany and Indonesia, and is strengthening its raw material supply chain management. In the past year, raw material prices have soared, with the prices of key minerals needed for batteries nearly doubling.

"We are trying to reduce dependence on imports of raw materials that are concentrated in some countries through diversification of the raw material supply chain," an LGES official said. "We aim to establish a stable global supply chain in the battery business, and we will take this opportunity to strengthen it further."

LGES is also reconsidering the start of construction of its Arizona battery plant in the U.S. considering the impact of inflation. Samsung SDI and SK On, which are also making large investments in the U.S., announced that they will continue their investments as planned at this stage.

"We are closely reviewing the timing, scale and details of investment due to a surge in investment costs due to the difficulties of the economic environment," LGES said.