Another “Raw Material Crisis?”

Not only oil prices but also prices of raw materials, including both steel and nonferrous metals, have jumped greatly.

Raw material prices have increased steadily in July and August, typically off-season. This is why some are raising concerns over the possible outbreak of another “raw material crisis” once peak season starts in September as it did in the first half of this year.

The government has laid out measures to stabilize the supply and demand of raw materials. However, achieving stability in the near future seems unlikely considering that the recent price increases are due to a combination of structural factors such as higher demand from China and a decline in global production.

According to the Ministry of Commerce, Industry and Energy and the businesses on August 20, import price of scrap iron jumped from $217 per ton as of the end of December last year to $299 as of August 15.

Import price of scrap iron has skyrocketed since June when it plunged to $222 after surging to $340 in February this year. The price on August 15 is 37 percent and 34 percent higher than the level of 2003 year-end and this year’s lowest of June respectively.

Price of copper also jumped from $2,665 per ton in June this year to $2,847 as of August 15. During the same period, ethylene price surged to $1,090 from $843, exceeding the $1,000 mark for the first time ever.

Aluminum, lead, nickel, and tartar prices have also climbed up rapidly.

Higher raw material prices have pressured companies, and the impact is now being materialized.

For instance, Samsung Heavy Industries saw a 68.4 percent drop year-on-year in its operating income in the first half of this year due to price increase in steel plate for shipbuilding. Hyundai Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co. also suffered a 58.8 percent and an 18 percent year-on-year decline in operating income respectively.

Large companies were fortunate enough to secure raw materials in advance, thereby saving themselves from the disruption in supply and demand. Small and medium- sized enterprises, however, are more troubled as they are not only having difficulties in securing raw material per se but also having problems in reflecting the cost increase into the prices of their goods.

To respond to the prices increase, Deputy Prime Minister & Minister of Finance and Economy Lee Hun-jai presided over an Economic Ministers’ meeting on August 20 at Gwacheon Government Complex and decided to double Korea’s steel supply including hot coil supply and increase the raw materials reserve for it to last 30 days from the current 20 days by next year.

In addition, all related departments will cooperate and crack down on cornering and hoarding of raw materials.

Ki-Jeong Ko Do-Young Kim koh@donga.com nirvana1@donga.com