High exchange rate nears financial crisis levels, threatening industries with increased costs

South Korea's won-dollar exchange rate has soared to its highest point since the 2009 global financial crisis, creating complex challenges for the nation's industries. The rate briefly surpassed 1561.5 won per dollar in late-night trading on May 4, driven by a strong dollar fueled by positive U.S. employment data and concerns over a prolonged Middle East conflict.

For export-oriented sectors like shipbuilding and automotive, a weaker won can boost revenue when converted into local currency. However, this benefit is increasingly offset by rising costs. Global factors such as higher oil prices stemming from the Israel-Iran conflict and increased U.S. tariffs are driving up the prices of raw materials, components, and logistics, adding a significant cost burden.

The automotive industry faces a dual impact. While companies like Hyundai and Kia see increased won-denominated revenue from their substantial U.S. sales, the surge in the exchange rate also inflates the won-equivalent of their foreign currency-denominated provisions for warranty services. Kia cited this as a factor in its first-quarter operating profit decline.

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While exporters may see benefits in terms of won-denominated sales, given South Korea's industrial structure heavily reliant on manufacturing and raw material imports, the high exchange rate must ultimately be viewed as a problem for the entire industrial sector.

Component suppliers and industries reliant on imported raw materials, such as petrochemicals and refining, are feeling the pinch more acutely. These companies pay for crude oil and naphtha in dollars, directly increasing their costs. While inventory and lagging effects from oil price fluctuations provided some buffer in the first quarter, this is not a sustainable solution. A prolonged high exchange rate, coupled with volatile oil prices, could lead to squeezed profit margins if product prices cannot keep pace.

Even consumer goods companies are affected. Domestic-focused firms like Ottogi and Dongsuh Foods face higher import costs for essential ingredients like wheat and sugar. Conversely, companies with a high export ratio, such as Samyang Foods, are relatively better positioned due to increased overseas sales in won terms. The aviation industry is also heavily impacted, with low-cost carriers particularly vulnerable due to dollar-denominated expenses for fuel, aircraft leases, and maintenance.

Experts warn that the prolonged high exchange rate could become a systemic issue for the entire industry. "While exporters may see benefits in terms of won-denominated sales, given South Korea's industrial structure heavily reliant on manufacturing and raw material imports, the high exchange rate must ultimately be viewed as a problem for the entire industrial sector," said Hong Ji-sang, head of the Trade Analysis Division at the Korea International Trade Association. He added that the extreme volatility, influenced by uncertainties in the Middle East and U.S. monetary policy, makes a short-term decline in the exchange rate unlikely.

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The extreme volatility, influenced by uncertainties in the Middle East and U.S. monetary policy, makes a short-term decline in the exchange rate unlikely.