S.Korea hit by raw material shortage

By JONG-HEON LEE, UPI Business Correspondent  |  Feb. 23, 2004 at 11:55 AM
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SEOUL, Feb. 23 (UPI) -- High prices of crude oil and raw materials are posing a serious threat to the resources-deficient South Korean economy, with growing concerns that surging import prices will build up inflationary pressure and undermine experts and domestic consumption.

Local manufacturers are striving to secure raw materials and the government has made "all-out" efforts to ease scarcity of industrial resources, but analysts warn troubles would prolong, putting a heavy burden on the nation's mainstay industrial sectors.

Some experts predicted an industry-wide crisis in the coming months due to the price hike as most manufacturers are expected to run out of their current stocks of raw materials in March.

Not a few brick-and-mortar factories have already stopped operations due to skyrocketing prices of raw materials. Some of manufacturers are ironically finding themselves losing profits as sales go up because the prices of their products are cheaper than the raw material costs.

"We have to scrap several production projects if we fail to procure enough steel plates in the near future," said Kim Hee-tae, owner of a company that produces construction materials. "It seems the worst shortages of raw materials since I began working at the construction sector 20 years ago," he said.

Prices of crude and other raw materials such as materials like steel sheets, lead, copper, timber and coal have surged since late last year due to a lack of supplies globally. This move has stimulated the prices of products of the leading industries like electronics, steel and automobiles because they are vulnerable to price fluctuations of raw materials. South Korea, which has few natural resources, imports most of what it needs for production.

Market analysts say robust growth in China's demands, fueled by the country's construction boom, has drained supplies worldwide, driving prices up. China increased its demand for iron ore by more than 18 percent to a record 407 million tons last year. Its iron ore imports grew to 146 million tons, accounting for 30 percent of global trade, according to Seoul's industry ministry. Steel billet is being traded for as high as $420 per metric ton, compared to $295 in the third quarter of last year.

South Korea's steelmakers have been forced to repeatedly raise prices to reflect the surge in import costs, passing on the financial burden to the nation's main industries, such as the auto, shipbuilding and construction.

The industry experts speculated the serious supply shortages could further worsen as China, the United States and India seek to restrain outflows of raw materials to protect their own steel industries.

South Korea, the world's fourth-biggest oil consumer, is also vulnerable to high global oil prices because it imports all of its crude oil requirements, more than 70 percent of which comes from the volatile Middle East.

Global crude prices stayed high throughout the year as oil-cartel OPEC, which controls half world crude exports, kept a tight rein on output. The central Bank of Korea says crude prices are expected to remain firm on international markets, due to strong demand from China and worries out terror attacks.

"The heightened demand from China and possible terror attacks could make crude prices hover around $30 per barrel for the long-term period," said BOK economist Park Sang-il.

Seoul's energy ministry says the country would increase its oil reserves to cope with possible further rises in prices. The government will also extend lower tariffs on crude imports to stabilize domestic oil prices.

The government has also decided to lower the import tariff quotas for main raw materials whose prices have risen sharply. The government has asked Korean company POSCO, the world's fourth-largest steelmaker, to supply more thick steel plates to ease domestic shortages.

However, experts remain skeptical that the measures will address the troubles because the lack of raw materials is primarily caused by explosive demand in China described as "black hole" of raw materials.

"The raw material prices remain strong for the time being because of robust growth in China's demand," said Kim Kyung-joon, a fellow of the Samsung Economic Research Institute.

The rise in import prices of crude and raw materials comes as the South Korean economy depends on exporters to maintain growth amid the protracted slump in domestic consumption, which has dragged the long-awaited economic recovery.

Rising import prices are also threatening the government inflation target of around 3 percent, raising the specter of stagflation -- a combination of stagnation and inflation. According to the BOK, a 10 percent movement in crude oil prices leads to an average 0.37 percent change in consumer prices and 0.61 percent for producer prices.

South Korea's import prices, a key inflationary force in a country possessing few raw materials, have continued to go up since late last year. The BOK says import prices in January experienced their fastest on-year gains in 32 months, due to upswings in global crude oil and raw material costs.

Import prices, measured in terms of the won, rose 1.8 percent in January from the previous month and 7.4 percent from a year earlier. The annualized rate was the highest since May 2001 when the index jumped 9.4 percent. The index climbed 1.8 percent in December from a month ago following increases of 2.7 percent in November and 3.1 percent in October.

"Due to soaring prices of oil and raw materials, import prices remain unstable," BOK researcher Youn Jae-hoon said. "Still worse, the won's strength against the dollar and the euro helped keep import prices from rising further," he said. "Continuing increases in import prices will not only stoke inflation, but also aggravate the profitability of businesses," Youn said.

Market experts said that import prices are expected to rise further due to strong global demand for raw materials caused by world economic recovery as well as low interest rates.

"South Korea has few natural resources and relies on exports for the economy has much to lose in the face of shortages of raw material and energy supplies," said Lee Moon-bae, a researcher at the Korea Economic Energy Institute.

Minister of Finance and Economy Lee Hun-jai said the country's economy may have trouble achieving its growth target of 5 percent this year, citing concerns about the high costs of crude and raw materials.

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