Plunging oil prices are welcome news for the overall economy of energy-hungry South Korea by giving companies and consumers extra money to spend, but they will come down hard on already-struggling oil refiners and shipbuilders, market watchers said Wednesday.
Oil has taken a beating after the Organization of the Petroleum Exporting (OPEC) countries last week decided not to cut output, letting the price slide further. Dubai crude tumbled to $65.33 a barrel on Monday, the lowest level since September 2009, according to the state-run Korea National Oil Corporation (KNOC).
The free fall in price comes as rising shale production in North America sustains an oil glut while the global economy has not yet fully recovered, hurting oil and gas exploration companies.
For South Korea, which relies on oil imports to meet 97 percent of its energy demand, the depressed oil price reduces costs of transportation and energy-intensive production. The government expects saving on energy costs, a large share of consumers' basket, to boost spending in other goods and services, giving relief to Asia's fourth-largest economy suffering from consumption slump.
"The falling oil prices will save production costs of companies and increase household disposable income, which would have positive impact on the South Korean economy in general," the Ministry of Strategy and Finance said in a report on Tuesday.
The ministry, however, raised the possibility that continued fall in oil prices could restrict the country's nominal economic growth rate, an indicator for economic expansion plus inflation, as consumer price growth has stagnated at around 1 percent for months.
The average retail price dipped to 1,702.9 won last week, the lowest level since October 2010, and it is poised to slip further in the coming weeks, the KNOC said in a report.
The Hyundai Research Institute said in its report that a 10 percent slip in oil prices can boost domestic consumption and investment by 0.68 percent and 0.02 percent each, while pushing up exports by 1.19 percent. In that case, the gross domestic production would rise 0.27 percent and lower the consumer price by 0.46 percent, it said.
"Falling oil prices can greatly boost the domestic economy, but the government will have to prepare measures if consumer prices remain low for a prolonged period," said Jung Min, a senior researcher at the Seoul-based think tank.
A closer look at the industry showed the biggest direct beneficiaries are airline companies, which spend one third of their expenses on spot jet fuel.
Korean Air Lines Co., South Korea's largest air carrier, saw its operating profit rise by 50.3 percent on-year to 240.7 billion won in the third quarter on falling fuel costs, although its sales edged down 0.6 percent. The carrier, which collects about 22 percent of profit from cargo service, expected improved earnings in the fourth quarter on cheaper fuel.
Also rosied by expected peak winter season, shares of Korean Air and No. 2 Asiana Airlines Ltd. surged 14.4 percent and 20 percent, respectively, in November.
Hanjin Shipping Co., the nation's leading shipping line, and the Korea Electric Power Corporation, the state-run electricity provider, were also expected to post increased earnings by saving on energy bills.
"Despite the sharp fall, oil prices are likely to remain at the current level for a while, and they will help aviation, shipping and power utilities offset foreign exchange risk in the near-future term," said Ju Ik-chan, a researcher at I'M Investment & Securities Co.
The blessings were mixed for South Korean carmakers as cheaper gas usually encourages customers to buy large vehicles that produce higher margins, while lessening sales of small cars and energy-efficient models.
"It is likely that demand for large vehicles will rise, considering increased sales of pickup trucks and sport utility cars in the U.S.," Lee Hang-ku, a researcher at the Korea Institute for Industrial Economics and Trade, said.
Energy-efficient cars, however, saw sales decline last month as customers find them less attractive under low energy costs.
Domestic sales of hybrid models came at 2,516 vehicles on average from January to May, a 26.4 percent hike from a year earlier, but it has been on a downward slide since June in line with falling oil prices. The monthly average sales of hybrid vehicles by Korean automakers tallied 1,927 in the June-October period, retreating 1.4 percent on-year, according to industry data.
"We are closely watching for how long oil prices remain low," an official at Hyundai Motor Co., South Korea's leading automaker.
"If this trend continues, we will promote mid and large-size cars to expand sales."
Falling crude prices are adding to the woes of Korean refiners already hurt by feeble global demand and low cracking margins because it could devalue the current crude stockpiles that were purchased months ago at higher prices, analysts said.
Nevertheless, the price fall in the mid and long-term is not catastrophic for the refiners as it would improve sales of petroleum products and push up record-low cracking margins seen earlier this year, they noted.
"If oil prices continue to fall by the end of this year, it would enhance cracking margins next year without having to devalue the crude stockpile," Lee Yong-joo, a researcher at Shinhan Investment Corp., said.
Shipbuilders, one of the biggest losers in the South Korean stock market this year, may also feel the chill as global oil and gas companies are cutting their spending on deep-sea exploration projects, clouding the prospect for drill ships and offshore plant operations.
Korean builders, which have won several construction deals in the Middle East over the past few years, were closely monitoring the ongoing oil price war, raising concerns over the shrunken budget for state-led development projects in the oil-rich countries. (Yonhap)
