Rising Raw Material Prices Put Restraint on the Economy

Skyrocketing international raw material prices are raising concern over rising costs and falling profitability in corporate Korea.

The continuing upward trend in the international raw material market will likely further pressure the Korean economy, which ekes out growth with increasing exports amid a slump in investment and consumption.

According to a report, “The Trend in International Raw Material Prices in January” on February 10 by the Korea Importers Association (KOIMA), the raw material price index was 132.12 (with 1995 as a benchmark year). The index has been continuing its upward trend since September of last year.

Out of the 30 items the report was tracking, the prices of 23 items rose, with the prices of scrap and pig iron having jumped 41.94 percent and 21.67 percent respectively, led by strong demand from China. The prices of about three commodities--palm oil (2.73 percent), pulp (2.17 percent) and cotton ore (11.76)--fell while about the prices of four commodities remained unchanged.

.

The rising raw material price leads to a rise in the prices of intermediate goods. POSCO and Dongkook Steel Co. have already announced an approximate 10 percent increase in steel goods prices.

“With the dollar/won exchange rate falling (the appreciating won), the profitability in exports has deteriorated,” Kim So-lim, director of the Korea Automobile Manufacturers Association said. “The rising price of steel sheets for automobiles is exacerbating the management environment of the industry.”

In a report, “The Latest Trend in International Raw Material Prices and Their Perspective,” on February 10, the Bank of Korea (BOK) projected that the international price of Brent oil will hover around $30 a barrel during the first quarter from January through March. It also projected non-metal goods and grains will continue their upward trends, citing a shortage in supply.

The international oil price went up as much as $32.60 a barrel, led by high-speed economic growth in China, a production reduction by the OECD and the delay in the export of Iraqi oil.

“While the international oil price will likely to fall to about $27 during the off-peak second quarter, it may hover around $30 if another terror attack or political instability in the Middle East disrupts the production of oil,” said the BOK report.

The international price of raw materials, excluding oil, has been accelerating their upward trends since June of last year after a lull in February through May.

.

As of February, the prices of non-metal raw materials rose. Nickel went up as much as 173.7 percent, bronze 76.0 percent, zinc 32.8 percent, aluminum 22.8 percent. Grain prices also jumped. Soy bean rose to 73.8 percent, corn 30.6 percent and wheat 31.5 percent.

“Raw material supply is in short, compared with demand in the local market. The upward trend in prices will likely continue,” said Pak Sang-il, the collective analyst team leader of the BOK.

Jong sik Kong Joong-Hyun Park kong@donga.com sanjuck@donga.com