"One in Three Export Companies Cannot Pass on Soaring Logistics Costs to Prices... Profitability Worsens"

83.1% Cite "Rising Freight Rates" as Biggest Challenge
Cost Increases Delayed from First Half to Weigh Heavily in Q3

Amid sharp increases in international oil prices and maritime freight rates due to the aftermath of the Middle East war, one out of every three Korean export companies is absorbing higher logistics costs internally without reflecting them in product prices, resulting in deteriorating profitability.

The Korea International Trade Association announced on the 26th the results of its "Survey on Export Logistics Difficulties Due to Oil Price Fluctuations in the First Half of the Year," which targeted 219 Korean export manufacturers. According to the survey, 83.1% of responding companies (182 firms) cited "rising freight rates" as the biggest challenge in the first half of the year. In fact, the Shanghai Containerized Freight Index (SCFI) surged to 3,062 points, which is 2.3 times higher than before the Middle East war and far exceeds last year’s peak of 2,240 points. Additionally, 56.6% of responding companies (124 firms) pointed to "rising costs of raw materials and parts procurement" as a major difficulty.

Despite the mounting burden of freight rates and production costs, it has proven difficult to pass these increases on to sales prices. About 78.1% of respondents (171 firms) said they reflected less than 20% of the increased costs in their product prices, and 32.9% (72 firms) reported being unable to pass on any of the increased costs (a cost transfer rate of 0%). In contrast, only 5.5% (12 firms) were able to reflect more than 80% of the additional costs in their prices.

The continued absorption of costs has started to visibly impact company performance. About 85.9% of responding firms (188 companies) saw their operating profit margins decline in the first half of this year, with 39.3% (86 firms) reporting a drop of 3-5 percentage points. Considering that last year’s average operating margin for small and medium manufacturers was 4.6%, this suggests a significant decrease in on-the-ground profitability.

The Korea International Trade Association predicted that, despite the recent downward trend in oil prices, the burden of logistics costs will persist for some time as the price hikes from the first half of the year will be charged through the third quarter. This is because, in addition to the increases in bunker adjustment factor (BAF) and low-sulfur surcharge (LSS) for short-sea routes in July, inland container transportation costs in Korea are due to rise in August under an addendum to the Safety Freight Rate System for trucks. Even if the Middle East war ends, it is expected to take several more months for the normalization of global shipping capacity.

Jae-wan Han, Head of Logistics Services at the Korea International Trade Association, stated, "On the ground, companies are facing difficulties as accumulated oil price burdens and rising freight rates cannot be reflected in product prices, leading to declining profitability. In particular, the burden is expected to further increase for sectors with a high share of logistics costs, such as petrochemicals, food, and agricultural & marine products." He added, "The Korea International Trade Association will work with relevant ministries and institutions to devise measures to ease the logistics cost burden for small and medium export companies."

This content was produced with the assistance of AI translation services.