Small and Medium-Sized Enterprises Take a Direct Hit From Raw Material Crisis

“The construction market has taken a hard hit with the talks of publicizing the sales price of apartment units and the cost increase in raw materials by more than 30 percent from the end of last year. We are developing new products to present when the economy recovers, but we cannot invest in facilities since we cannot get much work. The banks will not loan money, saying that the loans for small and medium sized enterprises have increased too much.”

Kim Jae-woo (42), chairman of Ejentech, a company in the Incheon Suh-gu Seok-nam Industrial Complex which manufactures parts for both gas boilers used in apartments and precision machinery, frankly spoke of his anxiousness.

With the prolonged depression in domestic demand overlapping with rising raw material prices, the business sentiment of small and middle-sized manufacturers deteriorated even more than last year, and the upcoming forecast seems even worse. The small and middle-sized companies’ raw material crisis has turned out to be the worst in six years since 1998, when the foreign exchange crisis was at its peak.

-Business Sentiment Worsens

The Korea Credit Guarantee Fund recently conducted a survey on 1,700 companies which have annual sales of over one billion won that use credit guarantees, and announced yesterday that the business survey index (BSI) results for small and middle-sized enterprises showed that the BSI for the first quarter (January~March) of this year, which was an 82, sharply declined from last year’s fourth quarter (October~December) of 103.

If the BSI is lower than 100, it means that there are more enterprises with poor business showings than with good ones, and vice versa when going over 100.

The forecasted BSI for the second quarter (April-June) is 97, decreasing from last year’s forecasted BSI of 104 for the first quarter of this year, and it seems the economy will become even worse. It is the second consecutive quarter to have shifted the rising movement to a decline after the third quarter (July-September) of last year.

The companies which participated in the survey replied that “the rising raw material prices” (36.8 percent) to be the major cause for the slumping economy. “Decrease in domestic demand” (30.3 percent), “deterioration in fund raising” (27.5 percent), “decrease in export demands” (7.5 percent) and ‘aggravation in sales condition’ (5.4 percent) followed behind.

-The Worst Raw Material Shortage in Six Years

According to the Industrial Bank of Korea yesterday, the results for the survey on trends in small and middle-sized manufacturing companies for January conducted from February 1 through February 15 with 2,064 enterprises across the country showed that 28.9 percent of the companies answered that supplying raw materials was difficult, an increase of 12.1 percent from December’s 16.8 percent from last year.

This figure was the highest ever in six years after April, 1998 (25.6 percent), and the full-scale international raw material fluctuation with steel in the center in January seemed to have made the decisive effect.

Companies which answered that supplying funds were difficult numbered 35.0 percent, rising by 5.3 percent from last year’s 29.7 percent in December, and passed the 30 percent level for the first time in four months after last September.

Samsung Economic Research Institute’s executive director Jung Moon-geon said, “Exports focused on big companies are continuously improving, but from rising raw material prices, small and middle-sized enterprises are not able to join in the recovering economy, deepening the ‘polarization’. Small and middle-sized enterprises may instead undergo a shortage of funds at an economic transition stage, and the government’s institutional support is necessary.”

Joong-Hyun Park sanjuck@donga.com