According to industry sources on May 18, there are concerns that the exchange rate, which has surpassed 1400 won, may become a new norm at 1500 won. In March, the won-dollar exchange rate briefly crossed 1500 won for the first time in nearly 17 years since the financial crisis. The rate has remained above 1500 won, continuing the trend of high exchange rates. Meanwhile, the price of West Texas Intermediate (WTI) crude oil rose from $65.21 per barrel on February 26, before the conflict began, to $105.41 as of May 15, marking an increase of approximately 61.6%.
With the ongoing conflict in the Middle East driving up oil prices, companies are expected to face even greater challenges in managing costs. The structure of industries that import key raw materials such as iron ore and crude oil in dollars and sell them in won means that rising exchange rates directly translate into increased costs.
The steel industry is particularly vulnerable to high exchange rates. Major South Korean steelmakers, including POSCO, Hyundai Steel, and Dongkuk Steel, rely heavily on imports for iron ore and coking coal. While raw material payments are made in dollars, a significant portion of their sales is supplied to domestic shipbuilding, construction, and automotive sectors in won.
The challenge lies in the difficulty of passing on increased costs to product prices. The influx of low-priced steel plates and products from China has limited the ability of domestic steelmakers to raise prices. With a downturn in the construction market leading to weak domestic demand, the combined pressure of rising exchange rates is rapidly deteriorating profitability. The steel industry is increasingly burdened as it struggles to transfer rising costs to product prices while facing additional pressures from exchange rates.
The oil industry is also feeling the strain. The four major oil companies—SK Innovation, GS Caltex, S-Oil, and HD Hyundai Oilbank—are entirely reliant on imported crude oil, making them vulnerable to fluctuations in oil prices and exchange rates. The simultaneous rise in international oil prices and the sharp increase in exchange rates have significantly raised the costs of crude oil imports and increased cash outflow burdens.
An industry insider stated, "The price of crude oil we are currently importing has risen significantly, and once supply shocks ease, oil prices will normalize. However, if that happens, the rising exchange rates combined with declining inventory asset values will create risks that the oil companies must fully bear, leading to significant operational burdens."
While the first quarter saw some performance protection due to inventory valuation gains from soaring oil prices following the outbreak of the Middle East conflict, industry experts predict that if high exchange rates persist, the burdens of raw material procurement and increased financial costs will become more pronounced starting in the second quarter.
Professor Heo Jun-young of Sogang University’s Department of Economics noted, "It seems increasingly difficult for the exchange rate to drop back to the 1300 won range this year." Regarding strategies to cope with the prolonged high exchange rates and the Middle East conflict, he explained, "While the oil industry has alternatives like the Red Sea if crude oil cannot pass through the Strait of Hormuz, the steel industry currently lacks effective short-term responses. Ultimately, they will have to endure."
* This article has been translated by AI.
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