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Aviation and Logistics Industries Tighten Budget

Posted January. 04, 2008 03:02,   


New York’s West Texas Intermediate (WTI) hit the all-time high of $100 per barrel, casting clouds over Korea’s oil price sensitive industries such as aviation, shipping and logistics and textile.

Domestic companies have been paying a close attention to the oil prices reaching a landmark “100 dollars per barrel,” since such fear had been considered as a psychological “Maginot Line.”

However, the clout of the unprecedented price hike wasn’t as fierce as expected as number of domestic companies has devised crisis management strategies to prepare for soaring oil prices.

○ Textile and Chemical Industries Faces Challenges

If the oil prices increase by a dollar per barrel in the aviation industry, the annual operating profit of Korean Air and Asiana Airlines are expected to plummet by 30 billion won and 14.4 billion won, respectively.

Despite tight management since 2007, the domestic airlines got jittered by the faster-than-expected oil price hike. At present, the domestic airlines are considering either reducing or discontinuing unprofitable flights if oil prices continue to climb.

Korean Air announced “We are in need of estimated 1.33 billion gallons (about 32 million barrels) of jet oil this year. We’ll channel all of our efforts into saving jet oil.”

Shipping and logistics industries, in which oil price accounts for 20% of the product price, expressed their worries to be hit hardest by skyrocketing oil prices.

“We are trying to save every penny to reduce expenses spent to repair cars and change tires,” said an official from the Korea Express.

“We have to spend additional 2.8 million dollars (2.632 billion won) for each dollar increase of one ton of bunker oil. We are trying to cut oil expense while refueling in nations where oil prices are relatively cheap,” said an official from Hanjin Shipping Co.

Textile and petrochemical industries using oil as raw material are closely watching the oil price hike.

“We have benchmarked the price of Dubai crude oil at about 72 dollars per barrel when we devised this year’s management strategies. However, it has already surpassed 80 dollars per barrel. We will be reducing the output of products heavily depending on the raw material price,” said an official from KOLON.

DC Chemical also expressed its concerns, saying “Psychological impact is indescribable since our business is very responsive to oil prices and foreign exchange rates. Although we have prepared for the soaring oil prices, we’ll inevitably face more difficulties due to the limited countermeasures.

○ All the industries will suffer in the long term

The electronics industry including Samsung Electronics, LG Electronics and Hynix Semiconductor is not likely to suffer immediately from the high oil prices since they do not use oil products as raw materials. However, they are also paying a sharp attention to the oil prices since high oil prices may trigger increase in the logistics expense and material cost.

Carmakers said high oil prices may lower the sales by discouraging the consumers’ buying sentiment. Meanwhile, they expect car sales to increase in oil producing countries such as Russia, Brazil, and Middle Eastern countries.

Distributors and daily goods makers worry that oil prices may lower consumer’s confidence and push up the consumer price.

An official from CJ Cheiljedang Corp., a maker of flour and sesame oil, said, “Oil prices will inevitably influence logistics cost and raw material price over the long term. If oil prices reach the critical point, we have no choice but to raise the product price.”

Oil refineries, which will enjoy more profits in short-term along with oil price hike, believe that if oil prices keep rising, it would lay economic burden at home and abroad, slashing demand for the petrochemical products.

The domestic oil refineries are also concerned about the next government’s plan to cut gasoline tax.

“If oil prices increase dramatically, the government’s initiative to cut gasoline tax will no longer become effective and weaken the tax cut effect. If that happens, the public would blame high oil prices on oil refineries,” said an official from an oil refinery company.

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