Saturday, November 08, 2008

Key Export Items to See Sales Drop

NOVEMBER 08, 2008 09:16

Key Export Items to See Sales Drop
Dong A Ilbo

As the global financial crisis has spread to the real economy, the biggest challenge facing Korea is an export slowdown.

Back in 1998, when Korea faced a severe currency crisis, the country overcame its difficulties since most economies save a few Asian nations enjoyed an economic boom. Korea, however, cannot expect exports to help it out of economic difficulty this time, as developing markets such as China and India as well as advanced economies are slowing down.

Commentary: China and India have proven real growth sectors for Korean products in the last decade and recent 40% drops in BRIC funds values indicates precipitous plunge in Indian and Chinese purchases may soon follow.

Undeniably, all industries will suffer from falling exports. Most of all, industries that are heavily dependent on exports to developed economies are likely to see a significant setback since developed economies are being affected by a real economy slowdown.

Commentary: It stands to reason that China and India will provide greater net downturns in export volumes.

The Knowledge Economy Ministry said Korea’s exports to Europe last month declined 8.2 percent from the previous year, in stark contrast to its year-on-year growth rate of 23.7 percent in October last year. Similarly, the year-on-year growth rate in trade with other economies including that of the United States (32.6 percent to 10.8 percent), and Japan (nine percent to 5.5 percent) has also rapidly decreased.

Korea posted a double-digit export growth rate last month thanks to the weakening won and surging demand in developing economies such as the Middle East and Latin America. Export growth, however, is not expected to surpass 10 percent next year.

Commentary: Some expect it to fall to about 1% growth next year.

Samsung Economic Research Institute said exports will grow 8.3 percent and LG Economic Research Institute predicted 8.9 percent. Given depressed economic sentiment in developed economies, however, the forecasts could see further downward adjustment.

Commentary: The sooner the better as research indicates positive thinking is more well engendered under forecast terms of market realism.

The durable goods industry will be the first to suffer. When economic conditions worsen, consumption of durable goods such as cars and electronics goods is the first to suffer. People tend to use durable goods for a longer period and hesitate to buy new ones in times of difficulty.

Commentary: Therefore former employees of Big Three car makers might best be retrained as auto repair specialists?

LG said American consumption of cars, electronics goods and audiovisual devices decreased three times faster than that of other goods when the United States suffered an oil shock in the late 1970s.

Yoon Se-uk, head of research at Meritz Securities, said, “As the car, IT and shipbuilding industries are most directly affected by the economic slowdown in developed economies, they will have more difficulty than other sectors.” The European market has seen falling sales.

Commentary: Lloyds claims shipping and ship production is floored with over five times required capacity in production orders for the next five years

Korea’s electronics industry, whose sales surged this year due to the weakening won and the Beijing Olympics, is unlikely to enjoy similar success next year.

The downturn in the car and shipbuilding sectors has also resulted in falling demand for steel. Steel production volume has increased but dropping demand has resulted in lower prices of most steel products.

Commnentary: Korean steel fabricators probably share similar concerns as shown in the graph below?

(The Fabricator)

The shipbuilding industry is also suffering. As the financial crisis has spread, ship owners have faced financing difficulties. Worse, the sector, which had enjoyed surging demand in recent years, will experience a sharp decrease in new orders soon. Most new orders, however, will go to Korean shipbuilders when economic difficulties deepen.

Commentary: Safe bet to say virtually any Korean comapny accustomed to easy credit terms in the last decade since "The IMF Crisis" is feeling financing difficulties?

IT sectors such as semiconductors and wireless communications devices will also see a sharp downturn. Semiconductor exports have fallen for four consecutive months due to falling prices resulting from oversupply, and are expected to face a prolonged slowdown. Exactly when semiconductor prices will rise again is unknown.

Commentary: Over-reliance on these two industries has been often commented upon and is the sticking point of moving Korea's industrial export dominated economic model towards an innovations led economy. Any suggestions and /or plans for this?

Demand for semiconductors is likely to fall significantly. Ju Dae-yeong of the Korea Institute for Industrial Economics and Trade said, “Since semiconductors are a kind of intermediate goods used to make electronics goods, personal computers and mobile phones, demand for semiconductors will fall when demand for consumer goods decreases.”

Exports of wireless communication devices such as mobile phones will slightly decrease. Industry experts say they will also be affected by economic conditions but demand for those devices will not fall significantly since Korea’s mobile device manufacturers have diversified their export markets. They have exported high-end goods to advanced economies, mid- and low-priced devices to developing economies, and parts of wireless communications devices to China.

Commentary: There still appears to be the expectation that developed economies are the root causes and singular affected parties at this time. Many opinions suggest that the global fallout in world trade will be significant reduction in developing economies trade.

The petrochemical industry is sensitive to economic conditions. Korea mostly produces petrochemical goods in China and exports to developed economies. Given that, China’s economic slowdown will inevitably deal a serious blow to Korean petrochemical companies. Samsung Economic Research Institute director Kim Jae-yoon said, “Since many Korean companies first export their goods to China and later to the U.S., most Korean industries will be influenced by the economic slowdown in advanced economies.”

Commentary: Again this admission is a good one and how large is the percentage of those goods? I would reckon up to 75% of Korean trans-shipments to China are destined for developed markets.

Korea’s textile exporters, however, could see a surge in profits this year given the weak won. Textile exports are likely to fall next year, however, due to weakening demand. Korea’s textile and clothing producers have avoided the negative influence of the economic slowdown since they have mostly sold low-priced goods to large-scale discount stores, but could suffer from falling demand when the global economy worsens.

Commentary: These textile producers are also facing stiffer competition from nations like India, China and Sri Lanka. It would be over-optimistic to expect Korean textiles to out-price these other nations.

No comments: