Korean Inc. hold off or streamline capex amid strong USD, interest rates, inflation

2022.09.28 10:31:23 | 2022.09.28 10:31:53

이미지 확대
Large South Korean companies that had pledged multiple billion-dollar investments over the next five years are adjusting their roadmap in the face of multiple whammies of soaring interest and dollar-won exchanges rate and wage pressure from strong inflation on top of unfavorable external commerce conditions from subdued demand and escalating protectionism.

Hyundai Oilbank on Monday held a board meeting to suspend its 360 billion won ($251 million) investment plan to add a crude distillation unit (CDU) and vacuum distillation unit (VDU). The facilities would increase capacity in petroleum products such as gasoline and diesel by boiling crude oil. Hyundai Oilbank had decided on the investment in May 2019.

The refiner is holding off expansion amid uncertainties in demand and production cost.

The move is a harbinger for a slump in facility investment as refiners have been better off from the impact from the jump in oil and other commodity prices and strong dollar. Korean refiners had enjoyed record earnings so far this year.

LG Energy Solution (LGES), the largest battery maker outside China, has turned cautious in its investment scheme in the United States. The company announced earlier to invest 1.7 trillion won to build a cylindrical battery factory in Arizona. The budget would have to increase from strong dollar and jump in U.S. interest rates.

The won has lost 13.7 percent as of August since the end of December. The weakening has deepened this month, pushing the U.S. dollar towards 1,500 won.

Hanwha Solutions also announced earlier this month to put off its investment plan to build a 160 billion won nitric acid DNT facility, citing soaring raw material costs. DNT is the raw material of toluene diisocyanate (TDI) that is used to manufacture polyurethane for furniture interior material and car seats. The prolonged Russia-Ukraine war and Covid-19 have worsened supply conditions.

Shinsegae Food cut capital increase in its U.S. subsidiary Better Foods by half. The company in July announced to invest $6 million in Better Foods but stopped the increase to $3 million. It also has folded the plan to infuse $4 million in the first half of next year.

Display manufacturers have been withholding facility investment due to soured TV demand.

Samsung Display has achieved 85 percent production yield for quantum-dot-based OLED panels that go into premium large TVs. It however has not pledged additional expansion.

It instead turned concentration on small- and mid-size OLEDs for smartphones and laptops.

LG Display, the dominant provider for OLED screens for large TV, has also been withholding expansion.

Given the prospect for entrenched strengthening in the dollar and higher interest rate environment, big Korean companies are expected to stay conservative in investments at least until next year.

“Companies face greater uncertainty due to economic slump, high inflation and exchange rates,” said Sung Tae-yoon, professor at Yonsei University. “The toll on earnings and capex is inevitable.”

Conglomerates are rushing to come up with contingency plans.

Top executives of LG Group affiliates are expected to meet for a meeting this week presided over by Chairman Koo Kwang-mo. SK Group will also hold a management seminar next month attended by affiliate chief executives and review business plans.

By Park Yun-gu, Oh Chan-jong, Jung Yoo-jung, Woo Je-yoon, and Lee Eun-joo

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]