High Commodity Prices Burdening Korean Economy

○ Skyrocketing prices for oil, gold, iron ore and crops

International oil prices are rising again, with West Texas Intermediate (WTI) futures prices edging upward from the stable mark of 90 U.S. dollars per barrel.

The March contract for NYMEX WTI futures closed at 100.01 dollars per barrel Tuesday, up a staggering 4.51 dollars from the previous day. Though the price had risen above 100 dollars during trading Jan. 2, this was the first time that the closing figure exceeded 100 dollars.

Spot prices for Dubai oil, which had climbed past 90 dollars last week, closed Tuesday at 91.61 dollars, up 1.05 dollars from the day before. This was close behind last month’s peak of 92.29 dollars recorded Jan. 4.

The influx of speculative funds is largely to blame for the oil price hikes, despite an anticipated fall in oil demand due to signs of weakening advanced economies. Worse, reports say member countries of the Organization of Petroleum Exporting Countries (OPEC) could cut oil output next month.

Another factor is the surging prices of raw materials. The April contract for NYMEX gold was traded at 929.80 dollars per ounce Tuesday, up 23.70 dollars or three percent from Monday. Korea Resources Corp. reported that Asian benchmark coal prices in Newcastle, Australia, rose to 125 dollars a ton, rising 145 percent from last year.

The sudden increase in crop prices is even worse. With massive new demand rising in bio-fuel production to tackle climate change, the futures prices of soya beans rose 95.8 percent, those of wheat shot up 79.9 percent, and those of corn grew 25 percent on the Chicago Commodity Exchange between January last year and last month.

○ Alarming News for Korean Economy

Higher global commodity prices translate into higher inflation for Korea, burdening not only low-income households but also state management of consumer prices and the formulation of counter cyclical measures.

With the Korean won depreciating in the wake of increasing investor preference for safe assets due to the U.S. subprime mortgage crisis, Korean companies face a higher price burden in importing crude oil and raw materials.

While inflation last month reached 3.9 percent, a 40-month high, import prices shot up 21.2 percent last month year-on-year, the highest rise since October 1998.

In December last year, when crude oil prices hovered around 80 dollars, the Korean current-account deficit reached 860 million dollars, the first in 57 months. The figure further rose to 3.38 billion dollars last month. February is also expected to see a deficit.

○ Industries Burdened With Higher Cost

The continuous surge in oil and raw material prices is alarming news to most Korean industries. Car manufacturers, shipbuilders and construction companies have especially suffered from the skyrocketing prices of iron ore and bituminous coal. This translates into higher prices for steel products, items which are pivotal to industrial production.

POSCO, Korea’s leading steel maker, will pay 65 percent more for iron ore this year. The company is still negotiating the price of bituminous coal, but the rise is expected to exceed that of iron ore prices. Consequently, POSCO could further raise the price of cooled soft steel sheets used in cars and refrigerators, following a prior hike of 11 percent from 600,000 won per ton to 665,000 won.

As a result, the car industry has warned of deteriorating profitability that could lead to losses of at least 140 billion won. If the additional burden is passed on to consumers, the price of a new car could rise 60,000 to 80,000 won.

higgledy@donga.com bae2150@donga.com