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[Editorial] Higher Raw Material Costs Should be Distributed Fairly

[Editorial] Higher Raw Material Costs Should be Distributed Fairly

Posted March. 20, 2008 07:58,   


Ready-mix concrete makers in the Seoul metropolitan area have halted production since yesterday, causing the majority of builders unable to continue with their concrete work. Construction projects in the new town of Dongtan, Gyeonggi Province have also been severely disrupted. Ready-mix concrete makers have gone on a strike, calling for a 12.5 percent increase in the price of ready-mix concrete. Meanwhile, construction companies, the consumers of ready-mix concrete, contest that the resumption of production is a precondition to negotiations and that last year’s increase of three to four percent was appropriate.

There is nothing new about the complaints of small- and mid-sized enterprises (SME) over the low prices of their products supplied to conglomerates. Not only is there no panacea to end the problem, it is not a matter that can be resolved by government intervention. However, the price of raw materials has jumped nearly 50 percent in one year while international oil prices have increased more sharply.

In a survey conducted by the Korea Federation of Small and Medium Businesses (KFSB), a large number of small- and mid-sized companies surveyed answered that price hikes of raw materials were the biggest cause for this year’s gloomy outlook. The Korean Chamber of Commerce and Industry (KCCI) also conducted a similar survey, asking some 600 manufacturers about the biggest hurdle to investment. Almost half of them responded that hikes in raw material prices were the main reason. Given these circumstances, conglomerates must not abuse their dominant position by asking SMEs to shoulder the entire burden.

Price indexation, which KFSB Chairman Kim Ki-mun has suggested, can be a solution. According to the proposed system, the prices of goods SMEs deliver to conglomerates can change according to price fluctuations in raw materials. The Small and Medium Business Administration also proposed this system to President Lee Myung-bak. Some 60 percent of SMEs have yet to adjust their product prices in line with rising raw material costs. If the indexation system is implemented, it will help SMEs alleviate difficulties. A symbiotic relationship should be sought when KFSB Chairman Kim and Federation of Korean Industries Chairman Cho Seok-rae meet in a few days to discuss the details of adjusting prices of products supplied by SMEs.

Prior to the strike by ready-mix concrete makers, some cast iron companies supplying products to automakers discontinued production, demanding more money for their products.

Asphalt concrete, can and plastic makers, as well as, cast iron companies are considering collective action. Strikes are not a solution to ease difficulties caused by skyrocketing raw material prices in the international markets. Both conglomerates and SMEs must share the burden and strive for productivity improvement so that they can minimize the impact of the increased costs.