[Exchange Rate 1400 Won] Dollar Debt and Raw Material Import Costs Burden... Battery and Petrochemical Profitability Deterioration

On the 22nd, USD-KRW Exchange Rate Surpasses 1400 Won in Forex Market
Battery and Petrochemical Industries Face Cost Burdens and Overseas Investment Difficulties Due to High Exchange Rate

[Image source=Yonhap News]

[Asia Economy Reporter Oh Hyung-gil] As the won-dollar exchange rate soars, domestic battery and petrochemical industries with large dollar debts are concerned about deteriorating profitability.

According to the foreign exchange market and related industries on the 22nd, the won-to-dollar exchange rate exceeded 1,400 won that day. It is the first time in 13 years and 6 months since the exchange rate recorded the 1,400 won level, which was on March 31, 2009 (high of 1,422.0 won) during the financial crisis.

Accordingly, the battery and petrochemical industries inevitably face increased cost burdens due to the high exchange rate. These industries are conducting large-scale overseas investments to meet global demand growth and transition to eco-friendly future businesses, resulting in a sharp increase in foreign currency liabilities.

A battery industry official explained, "While an increase in the exchange rate may have a sales growth effect in terms of operating profit, the increase in foreign currency debt means that non-operating losses could grow."

LG Energy Solution's foreign currency liabilities denominated in dollars surged 24.5% from 3.4119 trillion won at the end of last year to 4.2493 trillion won at the end of June this year. It is also estimated that a pre-tax net loss of 163.8 billion won would occur if the exchange rate rises by 10%.

An LG Energy Solution official stated, "We manage risks from exchange rate fluctuations through hedging, so there is no significant impact on financial soundness." In particular, the battery industry is facing increased cost burdens due to large-scale new investments, compounded by the exchange rate burden.

Since payments for battery exports are made in dollars, there may be an increase in performance figures due to the rising exchange rate, but the extent is not large, so the impact on stock prices is expected to be limited.

The steel industry, which imports raw materials such as iron ore and coking coal necessary for steel production, is also facing red flags on profitability due to the sharp rise in exchange rates. Although export activities allow for exchange rate hedging (risk avoidance), if the high exchange rate trend prolongs, the burden will inevitably increase.

Recently, with global economic slowdown causing steel demand to shrink, it has become difficult to fully reflect the increase in raw material costs due to exchange rate hikes in product prices. Market analysts predict that the operating profits of major domestic steel companies such as POSCO Holdings and Dongkuk Steel in the third quarter could decrease to half compared to last year.