[Urgent Survey of Top 1000 Companies] Concerns Rise Over Year-End Investment Withdrawal and Performance Damage Amid 'Raw Material Cost Crisis'

Akyung-Korea Chamber of Commerce and Industry, Survey on Business Environment of Top 1,000 Revenue Companies
60.6% of Companies Suffer Profit Damage Due to Soaring Exchange Rates and Raw Material Prices
Companies Continue to Withdraw or Postpone Investments

"The surge in raw material prices has created an environment where continuing construction is difficult."

This was the reason given last month when Hyundai Oilbank decided to halt its new investment of 360 billion KRW in CDU (atmospheric distillation process) and VDU (vacuum distillation process) facilities. CDU and VDU are facilities that produce petroleum products such as gasoline and diesel by distilling crude oil. Hyundai Oilbank had decided to invest in these facilities in May 2019. [Related Article] Emergency Survey of Top 1000 Companies

Cases of withdrawing or postponing investments due to raw material prices and high interest rates have increased significantly this year. SK Hynix also postponed its 4.3 trillion KRW investment to expand the new semiconductor plant (M17) in Cheongju in June this year, and Hanwha Solutions announced last month that it would withdraw its plan to establish a 160 billion KRW production plant for dinitrotoluene (DNT, a polyurethane raw material used in furniture interiors).

According to a survey conducted on the top 1000 domestic companies by sales, jointly conducted by Asia Economy and the Federation of Korean Industries on the 24th, among respondents (33 companies) who lowered their performance forecasts compared to the beginning of the year, 60.6% cited "increased production costs due to exchange rate and raw material price surges" as the reason for the downgrade.

Following that were "global demand sluggishness due to major countries' tightening policies" (21.2%) and "production disruptions due to global supply chain damage" (15.2%). In the survey results on reasons for downgrades by industry, "increased production costs due to exchange rate and raw material price surges" showed the highest response rate in most industries.

In particular, the rise in raw material prices combined with a high exchange rate trend has placed companies in an even tougher business environment. Regarding the impact of "exchange rate rising above an appropriate level (weak won)," the survey showed that "profit decrease due to increased raw material import costs" had the highest response rate at 38.0%. Next were "profit increase due to improved price competitiveness in overseas markets" (27.0%) and "improvement in financial structure due to the rise in the won valuation of overseas bonds" (19.0%).

In the domestic industry, which has many export companies, it was conventional wisdom that when the exchange rate rises, "the price competitiveness of our exports improves and won-denominated sales increase." However, the profitability deterioration caused by the surge in raw material prices offsets the benefits of the exchange rate or even leads to profit damage.

According to the report "Determinants of Domestic Inflation and Implications" published by the Korea Capital Market Institute on the 17th, 60% of the domestic consumer price inflation rate in the second quarter of this year was caused by global factors: raw material price increases (40%) and supply chain disruptions (20%), while the proportion of domestic demand pressure was minimal at around 1%.

Senior researchers Jang Geun-hyuk and Baek In-seok of the Korea Capital Market Institute analyzed in the report, "The inflationary trend is expanding in major countries including Korea, increasing difficulties for economic agents," and "This inflation is mainly driven by global factors such as raw material price increases and supply chain disruptions." They added, "Unlike the U.S., domestic demand pressure does not have a significant impact on prices in Korea. This is due to domestic consumption not yet fully recovering from structural sluggishness."