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  • Strong Correlation Between International Prices of Raw Materials and S.Korea’s Economy
    2021-06-30 hit 582

    Strong Correlation Between International Prices of Raw Materials and S.Korea’s Economy

    - 0.43% increase in producer prices and 0.45% rise in export value when raw material prices are up 10% -

    - Less significant impact on prices compared to the past, global economy and risk preference affect price fluctuations -

     

    It has been argued that the Korean government and companies need to strive to stabilize the supply and demand of raw materials and secure product competitiveness as there is a strong correlation between fluctuations in international prices of raw materials and the South Korea’s economy, including domestic prices and exports.

     

    According to a report titled, ‘Determinants of International Raw Material Prices and the Impact on Korean Exports’ issued by the Institute for International Trade of the Korea International Trade Association (Chairman: Christopher Koo) on June 30th, international price fluctuations of raw materials affect the prices of all commodities that utilize raw materials as intermediate goods.

     

    Based on the analysis of the input-output table of the Bank of Korea, it was estimated that as of 2018, producer prices of domestic products would increase by 0.43 percent if the import prices of raw materials rose by 10 percent. It is an 0.19 percent point decrease from immediately after the financial crisis (0.62% up as of 2010).

     

    In particular, the industries with higher proportion of imported raw materials have bigger impact on prices when raw material prices jump. In the case of non-ferrous metals, which recorded 55.7 percent of import dependence as of 2018, the prices of domestic products rose by 2.87 percent when the import prices of raw materials increased by 10 percent. During the same period, steel with 34.9 percent import dependence went up 1.77 percent, and petrochemicals with 31.4 percent import dependence rose 1.48 percent.

     

    Moreover, higher international prices of raw materials resulted in an increase in production costs, a rise in export unit prices, and a decrease in export volume. It was presumed that the export unit price rose by 0.7 percent and the export volume fell by 0.25 percent when the international prices of raw materials increased by 10 percent. Export value advanced 0.45 percent due to a rise in unit prices. In fact, there was a strong correlation of 0.68 between the raw material price index and Korea's total export value for the last 20 years from 2000 to 2020.

     

    The analysis showed that the key common factors of fluctuations in international prices of raw materials were the 'global economy' and ‘risk preference’. The study of four indicators, including crude oil prices, non-ferrous metals, grain, and gold that are examples of raw materials, found that the global economy was the major factor, explaining 86.8 percent of the overall price fluctuations in raw materials and the second factor was risk preference, illustrating 22.3 percent of changes in raw material prices.

     

    The report stated, “Global economic uncertainty remains high due to COVID-19 pandemic. The changes in raw material prices can be used as a signal to see the direction of the global economy,” and added, “The upward trend in international prices of raw materials, which has continued since the second half of last year, will not have a significantly negative impact on domestic prices and exports.”

     

    Kang Nae-young, a senior researcher at the Korea International Trade Association, said, “However, it will be difficult for the small and medium-sized exporters to secure raw materials and they are likely to suffer from rising prices,” and stressed, “It is required for the companies to secure competitiveness through cost reduction and development of high value-added products, and the government needs to promote mid- to long-term measures, such as to stabilize the supply and demand of raw materials without setbacks.”

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