A view of a gas station in downtown Seoul on the 3rd after the New York Mercantile Exchange (NYMEX) finished trading at $110.60 per barrel, up 7% ($7.19) from the previous day, for West Texas Intermediate (WTI) for delivery in April. yunhap news
“As oil prices rise, it is difficult to immediately reflect the burden of rising costs in product costs, so there is currently no way other than being beaten.”
There was a sense of frustration in the sighing voice of an official from Company A, a domestic petrochemical company. In particular, Company A, which uses naphtha (heavy gasoline) extracted from crude oil as its main raw material, is absolutely dependent on Russian products. The official said, “They are trying to do something to the Middle East and the United States because it seems that imports from Russia are likely to be blocked, but there is still no result.”
As the situation in Ukraine is getting worse, screams are coming out from the entire domestic industry, which is directly or indirectly affected. This is because import and export controls are being strengthened due to Western sanctions against Russia in addition to the skyrocketing international oil prices. Korea has the highest dependence on foreign oil among the Organization for Economic Cooperation and Development (OECD) member countries. In addition, it is reported that the damage to domestic companies is increasing like a snowball as exports to Russia as well as imports of key raw materials from Russia are disrupted.
The oil refining industry, which gains inventory gains from high oil prices, is also anxious
According to the Hyundai Research Institute on the 3rd, it was analyzed that when the average annual international oil price reaches $100 per barrel, Korea’s economic growth rate this year will decrease by 0.3 percentage points (p) and when it reaches $120, it will decrease by 0.4 percentage points. In particular, production costs increased sharply in oil refining, steel, and chemical among major domestic industries. When the price of oil was $100 per barrel, the cost increase rate of the oil refining industry reached 23.5%, while steel (5.26%) and chemicals (4.82%) also rose significantly. “Oil price has already reached $110 per barrel,” said Joo Won, head of economic research at Hyundai Research Institute.
Even in the oil refining industry, which gains inventory valuation gains from high oil prices, anxiety is felt. Domestic refiners are stockpiling more than four months’ worth of crude oil. Since there is a time lag between the introduction of crude oil and the time of oil sale, inventory valuation gains occur when oil prices rise. However, if oil prices of more than $100 per barrel continue, demand for petroleum products will decrease due to the global economic downturn, and in this case, it is difficult to additionally reflect the increase in oil prices in products, which adversely affects profits. An official from the oil refining industry said, “The yield is the best when the level of $80 per barrel is maintained.” “We are closely monitoring the current situation.”
The situation in the steel industry, which turns blast furnaces that melt iron into electricity, is also not easy. This is because the increase in oil prices is directly reflected in the electricity rate due to the fuel cost indexing system. Airline and shipping companies have a structure in which fuel costs account for a large portion of their costs, so profits are bound to deteriorate as oil prices rise. In the case of airlines, fuel costs account for about 30% of the total operating costs, and in the shipping industry, fuel costs 10-25% of operating costs. In addition, it is reported that the tire industry is being directly hit by the rise in oil prices as it obtains major raw materials such as carbon black and synthetic rubber through petroleum. An automobile industry official said, “The rise in oil prices also acts as a negative factor in the demand for automobile purchases.
Visual _ Impact of rising international oil prices on the Korean economy
118 products with over 20% dependence on Russian products… Difficult to import due to Western sanctions
In addition, as the Western sanctions are likely to cause disruptions in the supply and demand of major raw materials from Russia, difficulties for domestic companies are aggravating. According to the Korea Institute for Foreign Economic Policy, 118 products that accounted for more than 20% of imports from Russia last year reached 118. Russia’s dependence on naphtha reached 23.4%, and 92.9% of ferrosilicochromium needed to make stainless steel was Russian. Among semiconductor materials, the dependence on palladium was high at 33.2%. An industry insider said, “The West is restricting imports and exports to Russia with the withdrawal of the International Telecommunication Interbank Association (SWIFT) and the application of the ‘Foreign Direct Product Rule (FDPR)’. If not, it could be like the ‘second number of factors incident’.”
Kim Hyun-woo reporter 777hyunwoo@hankookilbo.com