[Production Costs Soar] Raw Material Prices and Inflation... Pressuring Companies

Container unloading operations are underway at Busan Port's Sinsundae and Gammam Piers. The photo is not directly related to the article. [Image source=Yonhap News]

Concerns are rising that a "perfect storm" (a major complex crisis) is approaching the South Korean economy, which is based on manufacturing in a "resource-poor country," as high inflation, high interest rates, high exchange rates, and signs of low growth converge. The rise in raw material prices and inflation directly leads to increased production costs, burdening companies. According to a survey by the Korea Chamber of Commerce and Industry on the costs incurred by companies in production activities in the first half of this year, the increase rate was the highest since 2009, right after the financial crisis. With the exchange rate continuing to rise in the second half and growing pressure for wage increases, the shock to corporate production costs is expected to persist. The prolonged war between Russia and Ukraine, causing an energy crisis, is also a factor exacerbating the crisis.

Companies facing an uncertain business environment are in a situation where they must strategically postpone or reduce investment plans this year and focus on risk management. However, they cannot simply hunker down without a plan. The global industrial landscape is changing rapidly, and due to the supply chain war between the United States and China, it has become difficult to slow down production and investment speed.

Experts point out that survival strategies need to be more precise. Professor Lee Jeong-hee of the Department of Economics at Chung-Ang University said, "Production costs are increasing, but inventories are not being depleted and are piling up. Ultimately, this leads to an economic recession, but companies are facing greater burdens as unit wages rise due to the implementation of the 52-hour workweek system. Therefore, they need to consider measures to reduce costs, such as lowering corporate taxes."