A strong Korean won raised a red flag for some Korean exporting companies. Although most Korean export companies do not have any problems with existing export volume due to foreign exchange hedge, new volume will be significantly affected.
According to the Korean industrial world on November 17, Korean steelmakers are now in a position to withstand the high strength of the Korean won for the time being thanks to recent strong exports. On the other hand, automakers in a slump are forecasting that a strong Korean won will adversely affect their exports in the future. Shipbuilders also expect that a super strong Korean won will have a negative impact on them in landing new orders.
Rubbing Salt in the Wound of Automobile Industry
Automakers are concerned that their export competitiveness will weaken as both the won-US dollar and won-Japanese yen exchange rates will decline at the same time. Since Hyundai Motor and Kia Motors built local production bases in the US, Europe and China and the effects of a drop in the value of the Korean won shrank sharply compared to the past but the two automakers’ exports of domestically produced cars account for about 45% of their total exports. This means that more than 4 out of 10 export vehicles are under the influence of the depreciation of the Korean won. Payment with US dollars will inevitably bring about some exchange rate loss so Hyundai and Kia are carefully monitoring changes in foreign exchange rates. The acceleration of the depreciation of the Japanese yen is also a burden on the two Korean automakers in exporting vehicles.
The Korean won-Japanese yen exchange rate already fell below 1,000 won per 100 yen and down to the level of 970 won. Japanese automakers such as Toyota, archrivals of Korean automakers, are expected to relatively increase their price competitiveness, stepping overseas marketing efforts. If both the won-US dollar and won-Japanese yen exchange rates continue to decline, Korean automakers will suffer from a double whammy –- the deterioration of profitability and losing price war with Japanese automakers which are Korean automakers’ most formidable competitors.
It is said that the electronics industry suffers a loss of 30 billion won (US$27 million) per month if the won-dollar exchange rate contracts by 10 won. Changes in the Korean won-US dollar exchange rate directly impact earnings of the semiconductor and display industries which trade their products in US dollars in the US and China, their two main markets. In particular, semiconductors account for the largest portion of Korea’s exports, so such changes can have a big impact on the Korean economy.
"In preparation for foreign exchange rate risk, we are already trading some proportions in local currencies and regularly monitoring exchange rate risk via an exchange rate management system," an electronics industry official said. "Short-term exchange rate fluctuations are not a big deal, but if this trend holds, we need to devise proper measures."
"It is true that changes in exchange rates cut across sales and operating profits. We are striving for technology competitiveness that can overcome even exchange rates," a semiconductor industry official said.
Weakening Competitiveness of Shipbuilding Industry in Winning New Orders
Shipbuilders are implementing foreign exchange hedge through transactions of derivatives such as forward exchange futures when signing ship order contracts. Therefore, current exchange rate changes have no impact on the amount of contracts previously landed. However, as the shipbuilding industry is an export industry, if foreign exchange rates continues to fall, new orders will inevitably sink in terms of profitability.
The petrochemical industry is also keeping a watchful eye on exchange rates in order to cope with the negative aspect of exchange rate changes as the percentage of its export volume is high although a drop in the won-dollar exchange rate drives mixed results. Korean petrochemical companies may be able to reduce their cost for purchasing raw materials such as crude oil and naphtha due to the depreciation of won, but they are concerned about falling sales and profits in the export sector. This is because with the export of more than 50% of production to overseas markets, a dip in the won-dollar rate can directly impact earnings.
Accordingly, the petrochemical industry responds by reducing foreign exchange reserves or increasing spot trade when the won-dollar exchange rate falls. This is because if petrochemical companies expand futures trade when the exchange rate slides, it may lead to greater losses. An official of the petrochemical industry said, "Since the depreciation of won is an external factor, there is not much that we can do at the industry level. However, countermeasures are being taken to reduce negative effects by means of cost reduction and hedge system operation."
On the other hand, the steel industry facing a recovery of the global steel market is expecting both profits and losses from a super strong Korean won. "Although cost of raw materials such as iron ore and coal drops, which is a positive point, export prices rise. So the depreciation of the Korean won is somewhat disadvantageous to us. But the export market is supporting us as a cut in steel production in China turned the global steel market around for a recovery," said an official of POSCO.