[Production Cost Skyrockets]② Energy Crisis from Europe... Another Energy Freeze Hits in the Second Half

LNG Import Prices Hit Record High
Petrochemicals Show Highest Production Cost Increase
High Exchange Rate Trend Adds Business Burden

A natural gas power plant operated by French energy company Engie in Drogenbos near Brussels, Belgium. Russian state-owned gas company Gazprom notified that it will suspend gas supply to Engie from the 1st due to non-payment.
[Image source=Yonhap News]

[Asia Economy Reporter Choi Seoyoon] Even before the full onset of winter, an energy cold wave originating from Europe is becoming a reality. Due to supply chain disruptions caused by geopolitical risks, the import price of liquefied natural gas (LNG) hit an all-time high last month. With Russia indefinitely cutting off gas supplies to Europe, the upward trend in international energy prices is expected to continue for the time being.

According to the Korea Chamber of Commerce and Industry on the 23rd, among domestic manufacturing industries in the first half of this year, the petroleum and chemical sectors, which have a high proportion of imported materials, showed the highest increase in production costs. During this period, the production cost increase rates for petroleum refining and chemical industries, which use crude oil as their main raw material, were 28.5% and 10.5% respectively compared to the same period last year, ranking first and second among nine manufacturing sectors. Following these were non-metallic minerals (9.7%), primary metals (8.2%), and metals (7.2%), which use minerals such as copper, aluminum, and iron ore as intermediate inputs.

The surge in production costs in industries with a high proportion of imported raw materials was ignited by the international energy price spike triggered by the Russia-Ukraine war. In response to sanctions by the European Union (EU), Russia reduced its natural gas supply to 40% in June, cut it further to 20% in July, and completely stopped it on the 2nd of this month. Since the beginning of the year, the price of natural gas in Europe has risen by about 300%.

Due to supply shortages, the LNG import price has more than doubled in one year. According to the Ministry of Trade, Industry and Energy, the LNG import price, which was $535 per ton in August last year, reached a record high of $1,194.6 per ton in August this year.

An industry insider said, "Major European countries such as Germany, which have nationalized their largest gas companies, have taken measures that have somewhat improved LNG inventory status, but some European countries like Austria still have not found alternatives," adding, "Concerns over energy supply from Russia this winter are growing."

The rise in energy prices leads to increases in consumer goods prices, intensifying inflationary pressures. The Organisation for Economic Co-operation and Development (OECD) recently revised South Korea's inflation forecast for this year upward from 4.8% to 5.2%, an increase of 0.4 percentage points.

The high exchange rate trend also burdens manufacturing industries that rely on imported raw materials. A recent survey by the Federation of Korean Industries targeting research center heads of 15 securities firms predicted that the won-dollar exchange rate could rise to as high as 1,480 won. They assessed that "the cost burden caused by rising raw material prices and exchange rates will offset export growth."

Experts agree that global energy supply and demand uncertainties will increase in the second half of the year. Junho Byun, a researcher at IBK Investment & Securities, analyzed, "As countries tighten controls on energy exports and imports and increase efforts to secure imports and inventories, price increases may continue across products, and the more resource protectionism strengthens, the more intense the rise in energy prices could become."

There are also warnings that this situation could shake the domestic industrial base, which is highly dependent on overseas energy. Researcher Junho Byun evaluated, "Due to deteriorating energy supply and demand leading to reduced operating rates, production contraction, and continued expansion of trade deficits, the possibility of competitive energy acquisition wars among major global countries is increasing," adding, "This could adversely affect South Korea, where overseas energy dependence remains high at 91%."