Sharp dip in oil prices weighs on Korean firms

The sudden plunge in oil prices -- following the coronavirus outbreak -- is taking a toll on the South Korean economy, denting many key industries.

The hardest hit are the oil refining, construction, shipbuilding, steel and consumer goods sectors. Low oil prices, once considered a boon for the transport industry, are no longer beneficial amid falling consumption and travel restrictions.

In recent months, oil prices have dropped, mainly due to the global economic slowdown caused by the pandemic, alongside the failure of the Organization of the Petroleum Exporting Countries and Russia to agree on cutting production, according to the Korea Energy Economics Institute.

The think tank predicted the average annual price of the benchmark Dubai crude will be $42 per barrel this year, a sharp drop from $63.53 last year.

According to Hong Joon-pyo, senior analyst at Hyundai Research Institute, the oil price crash will hit Korean exports to OPEC countries as the countries may face an economic slump, citing similar cases in the past.

“From the mid-2015 to last year, international oil prices fell from $60 per barrel to around $20. In that year, Korea’s exports to OPEC countries fell 11 percent on-year. Exports of steel, automobiles and home appliances were also hit,” he said.

Other major sectors, such as shipbuilding, construction and plants, will also see fewer overseas orders due to financial difficulties in the oil-producing countries. In the past, construction shares were hit hard by plummeting oil prices, according to Hanwha Investment and Securities.

“When oil prices fell 75 percent in the wake of the 2008 global financial crisis, the Kospi’s construction index also fell 74 percent,” said Song Yoo-lim, an analyst at Hanwha Investment and Securities.

According to UK-based research agency Clarksons, global ship orders reached 300,000 compensated gross tonnage last month, down 85 percent from the previous year. Looking at the accumulated orders for ships between January and February, the figure was 1.17 million CGT, down 76 percent from 4.89 million CGT a year ago.

Falling oil prices also impact oil refining sectors as demand decreases.

The operating profit of the nation’s largest oil refiners -- SK Innovation and S-Oil -- are forecast to be 77.9 percent and 76.5 percent, respectively, lower than a month ago, according to industry watchers.

Some predict that the operating loss of SK Innovation, the industry’s No. 1 player in terms of oil-refining sales, may reach up to 400 billion won ($323 million) in the first quarter. S-Oil is expected to implement a voluntary retirement scheme for the first time since its inception in 1976.

Usually, the transport sector tends to benefit from falling crude oil prices.

However, it is difficult to expect such benefits this time as travel demand has fallen due to the spread of COVID-19. The number of flight passengers to and from Korea dropped 84.4 percent on-year as of the third week of last month, government data showed.

“Air, freight and road transport that use fuel are among the beneficiaries from low oil prices. But, as travel and movement have shrunk due to the outbreak, they are not benefiting from falling oil prices at all,” said Lee Dal-suk, a researcher at the Korea Energy Economics Institute.

“COVID-19 has dealt a blow to the affected industries without benefiting industries,” Lee added.

To counter the sharp drop in international oil prices, the government has vowed to operate an international oil price response team to monitor trends and impact on industries to figure out necessary measures.

The international oil price response team involves the Trade, Industry and Energy Ministry, Korea National Oil Corporation and the Korea Energy Economics Institute. The Trade Ministry said the group is carefully monitoring the situation.

By Shin Ji-hye (shinjh@heraldcorp.com)