Natural Hedge Mechanism Not in Operation
As POSCO and Hyundai Steel have difficulties in securing steel products for export due to production disruptions, they have trouble in coping with exchange rate risks.
Steelmakers such as POSCO and Hyundai Steel have dealt with fluctuations in exchange rates through a "natural hedge," which means purchasing raw materials with the foreign currencies earned through exports. But this mechanism will not work normally beginning in the fourth quarter of this year due to flooding at Pohang Works and a strike at Hyundai Steel.
POSCO has redirected a significant portion of its export volume to the domestic market, as domestic supply has been disrupted due to damage from Typhoon Hinnamnor. The company announced on Sept. 16 that production disruption due to the typhoon was estimated at 1.7 million tons of steel products. It said it would convert exports to domestic consumption as much as possible in order to minimize disruptions in domestic supply.
A strong U.S. dollar is usually advantageous for exporters. But it acts as a cost burden when they import raw materials. POSCO and Hyundai Steel offset the burden of importing raw materials with exports, but if their export volume decreases, their cost burden will only expand. The won-dollar exchange rate stood at 1,100 won at the beginning of this year, but crossed the 1,300 won level in July and has stayed at the 1,400 won range since Sept. 23.