High raw material costs feared to erode corporate earnings

Soaring international raw material costs are feared to eat into South Korean companies' earnings and drive up consumer prices down the road, a report showed Monday.

Stung by fast-rising oil and other material prices, the operating margin of local companies is expected to reach 3.4 percent this year, down 1.8 percentage points from the average 5.2 percent between 2015 and 2019, according to the report from the Korea Economic Research Institute (KERI).

The operating margin of large businesses is projected to decrease 2 percentage points over the cited period, with that for small and midsized enterprises likely to drop 1.5 percentage points.

The operating margin refers to the ratio of operating income to sales and serves as a key barometer of a company's profitability.

The report comes amid a jump in raw material costs, which KERI attributes to the effect of rising coronavirus vaccination rates and a sharp recovery in the global economy.

International crude prices, for example, have risen five times from April last year, when they hit their nadir during the coronavirus pandemic.

US West Texas Intermediate (WTI) crude futures changed hands at $75.03 per barrel, compared with $15.06 in April last year.

Rising raw material costs have sent South Korea's import prices jumping this year. In the first nine months of this year, the country's import prices in terms of its currency spiked 32.3 percent from the same period a year earlier.

KERI, the research arm of South Korea's top business lobby, the Federation of Korean Industries, said the country's consumer prices are likely to rise sharply this year due to surging material costs.

South Korea's consumer prices are expected to rise an additional 1.6 percentage points this year should companies pass on half of increased costs to product prices, it added. (Yonhap)