• The exporters express mounting concern over diminishing profitability from skyrocketing raw material
    2022-04-25 hit 530

    The exporters express mounting concern over diminishing profitability due to skyrocketing raw material prices


    - KITA hosted “Impact assessment meeting on the trading sector arising from skyrocketing raw material prices” with officials from associations representing 16 industries

    - Tariff free imports or a temporary lifting of tariffs to 0% are measures strongly needed for energy source imports, including crude oil and naphtha

    - Well-planned supply chain management and securing sufficient level of key materials in stock remain as essential tasks


    Companies from the export business sector all express concerns of maintaining their business afloat due to diminishing profitability triggered by skyrocketing raw material prices.


    The Korea International Trade Association (Chairman: Christopher Koo) hosted an “Impact assessment meeting on the trading sector arising from skyrocketing raw material prices” on April 18th at the Trade Tower in Samseong-dong. KITA announced that it made estimations on additional production costs by key respective export industry sectors and listened to imminent issues plaguing relevant industries.


    Officials from associations representing 16 industries, including semiconductor, petrochemical, automobile, shipbuilding industries, all called for introducing measures at a pan-government level as companies are suffering from plummeting profitability from their exports due to skyrocketing raw material prices.


    The Korea Petroleum Association and the Korea Petrochemical Industry Association stressed the need to eliminate tariffs for crude oil and Bunker C oil, which are currently subject to a base tariff rate at 3%, considering the current oil price levels exceeding $100 per barrel may persist due to the war between Russia and Ukraine. The two associations are making this request as the U.S. maintains low tariff levels on these items, ranging between 0.1% and 0.2% and also considering that key OECD countries have already eliminated tariffs on these items. The petrochemical industry sector estimated the government to collect KRW 320 billion (approx. USD 258 million) worth of tariffs from naphtha imports this year, which is attributable to a 30% spike in naphtha prices compared to the level earlier this year that was triggered by a complete suspension of heavy naphtha imports from Russia.


    Industry sectors demanding a sizable supply of metal, including the shipbuilding, automobile and automobile parts and general machinery, all expressed concerns arising from skyrocketing raw material prices. The Korea Offshore & Shipbuilding Association mentioned, “Domestic shipbuilding yards was hit hard by plummeting profitability as the price of thick plates hit record levels with the price of this item reaching KRW 1.4 million (approx. USD 1,125) per ton this April” and added, “If additional costs of making more expensive thick plate purchases are reflected on the provision for construction losses, fiscal operating loss can reach as much as KRW 4.4 trillion.” The association also claimed diversifying import sources of magnesium - a key material used to produce lighter automobile parts - is far from being feasible as China supplies 90% of global magnesium demands.


    The information technology sector is also faced with a similar unfavorable situation. Semiconductors use neon - a rare gas required during the production process - and Korea depends on Russia and Ukraine for 30 to 50% of its demand. The import price of this material skyrocketed by 156% between January and February, adding trouble to the industry. Although the semiconductor sector secured sufficient amount of neon that can help the industry short-term and has another option that can replace neon imports from Russia and Ukraine, the sector has limited options in securing neon imports in the future as the price of Chinese neon is skyrocketing at a higher rate.


    Aside from the risk arising from rising raw material prices, other supply chain risks are surfacing as knock-on effects of the war between Russia and Ukraine and China’s lockdown measures. The Korea Association of Machinery Industry pointed out that some excavator manufacturing companies made an early move to purchase required parts and materials after receiving orders of 45 - 120 tonne excavators from Russia. However, the association highlighted the need to devise ways to minimize loss of these companies as finished excavators cannot be exported due to a blanket closure of export channels to Russia. Additionally, it is reportedly known that Korean machine tool production companies that have business operations in currently locked-down areas in China, including Shenzhen, are suffering from both securing parts needed for production and diminishing sales resulting from disruptions in logistics in China.


    Christopher Koo, the Chairman of KITA, mentioned “Our exporting companies are facing an uphill battle against rising production cost to save every penny to ensure price competitiveness.” He also stressed, “Well-planned supply chain management and securing sufficient level of key materials in stock remain as essential tasks to overcome inflation and supply chain risks and the government and the private sector should consider all plausible scenarios and collect wisdom to overcome the current crisis.”

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