High Foreign Currency Debt Causes Losses When Exchange Rates Rise
Debt Decreases and Foreign Currency Assets Increase This Year
LG Ensol Dollar Exchange Rate Up 10% Results in 29.3 Billion KRW Profit
Domestic battery and material companies such as LG Energy Solution, SK On, Samsung SDI, EcoPro, and POSCO Future M are estimated to earn a profit of approximately 37 billion KRW this year due to an 8% increase in the exchange rate.
In the past, when the exchange rate rose, interest on foreign currency loans also increased, resulting in losses. However, the structure has changed to generate profits as foreign currency assets have increased. The increase in overseas expansion and active foreign exchange hedging have also contributed to this.
On the 22nd, the won-dollar exchange rate closed at 1,336 KRW, down 4 KRW from the previous day in the Seoul foreign exchange market. The won-dollar exchange rate started at 1,273 KRW (January 2) at the beginning of this year and has risen by more than 8% this year alone. The prospect that the U.S. Federal Reserve will maintain a tightening stance for the time being has increased the likelihood of a continued strong dollar phenomenon.
Analysis of business reports from five domestic battery and material companies showed that if the won-dollar exchange rate rises by 10%, the five companies would generate a total profit of 46.7 billion KRW.
LG Energy Solution estimated that a 10% increase in the won-dollar exchange rate would increase its pre-tax profit by 29.3 billion KRW. Under the same conditions, a loss of 82.8 billion KRW was expected at the end of last year. The reason for the change in situation over one year is due to foreign currency assets. LG Energy Solution's dollar assets increased by 23.7%, from 3.628 trillion KRW at the end of last year to 4.488 trillion KRW at the end of the first half.
On the other hand, dollar liabilities decreased by 5.8%, from 4.457 trillion KRW to 4.1944 trillion KRW during the same period. A representative from LG Energy Solution explained, "Profits are being generated as dollar assets increase," adding, "However, the foreign exchange simulation results differ somewhat from the valuation gains."
Samsung SDI's dollar assets significantly increased from 3.1204 trillion KRW at the end of 2021 to 5.1222 trillion KRW last year. A 10% rise in the exchange rate is expected to yield a profit of 3 billion KRW. Conversely, it experienced a loss of 56 billion KRW last year. Similarly, EcoPro and POSCO Future M are expected to earn profits of 5.1 billion KRW and 930 million KRW, respectively, if the exchange rate rises.
SK On is also expected to earn a profit of 9.3 billion KRW if the exchange rate rises by 10%. However, in SK On's case, liabilities increased significantly more than foreign currency assets. Foreign financial assets slightly increased from 419.52 million USD at the end of last year to 490.16 million USD at the end of June, but foreign currency liabilities nearly doubled from 953.93 million USD to 1.84409 billion USD. The reason for the profit is that they had prepared in advance for exchange rate fluctuations.
An SK On representative said, "We have entered into forward exchange contracts for the purpose of hedging foreign exchange risk," adding, "Most of the foreign exchange risk affecting foreign financial assets or liabilities can be offset by the foreign exchange volatility affecting operating profit, so we are properly controlling foreign exchange risk."
Although battery and material companies have significantly improved their response to exchange rate fluctuations, they still hold substantial foreign currency liabilities. Especially since they plan large-scale overseas investments in the next two to three years, long-term exchange rate increases remain a burden.
Accordingly, companies manage risks from exchange rate fluctuations by directly issuing foreign currency bonds or attracting investment funds in dollars from overseas investors. LG Energy Solution successfully issued a total of 1 billion USD in global bonds for the first time since its launch on the 19th, including 400 million USD with a 3-year maturity and 600 million USD with a 5-year maturity. The global bond issuance attracted participation from 114 institutional investors for the 3-year bonds and 186 for the 5-year bonds, with orders reaching five times the total offering amount.
LG Energy Solution invested 6.3 trillion KRW in battery production-related capital expenditures (CAPEX) last year and plans to increase investment by more than 50% compared to the previous year this year. SK On also succeeded in attracting 400 million USD (approximately 530 billion KRW) in investment from financial investors (FI) in Singapore last June.
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