Freight Rates Are Soaring, but Prices Cannot Be Raised... One in Three Exporters Is Absorbing Logistics Costs

[Financial News] Exporters are facing heavier logistics costs as international oil prices and sea freight rates rise, but many companies are unable to pass the added burden on to product prices. In particular, one in three companies said they could not pass on any of the increase in logistics costs, suggesting that weaker profitability is unavoidable.
According to a survey on export logistics difficulties caused by oil price fluctuations in the first half of the year, released by the Korea International Trade Association (KITA) on the 26th, 83.1% of 219 domestic export manufacturers said rising freight rates were the biggest logistics challenge in the first half of this year.
In fact, sea freight rates have surged since the conflict in the Middle East. The Shanghai Containerized Freight Index (SCFI) rose to 2.3 times its level before the Middle East war, increasing the logistics burden on exporters.
The problem is that companies are failing to reflect the higher costs in product prices. Of the surveyed companies, 78.1% said they passed on less than 20% of the increase in logistics costs to selling prices. Among them, 32.9% said they did not pass on any of the cost increase at all.
By contrast, only 5.5% of companies said they reflected more than 80% of the increase in logistics costs in selling prices. This appears to reflect the reality that price hikes are difficult because of export competition and contracts with business partners.
The logistics burden also had a direct impact on corporate earnings. A total of 85.9% of surveyed companies said their operating profit margins in the first half of this year fell from a year earlier.
The most common response, at 39.3%, was that operating profit margins fell by 3 to 5 percentage points. Given that the average operating profit margin for domestic small and medium-sized manufacturers last year was 4.6%, the rise in logistics costs alone has sharply weakened profitability for many companies.
KITA said the burden on exporters is unlikely to ease anytime soon, as volatility in oil prices and freight rates is expected to continue for the time being amid instability in the Middle East situation.
Han Jaewan, head of KITA’s Logistics Service Division, said, "As companies fail to fully reflect the accumulated burden of higher oil prices and freight rates in product prices, profitability is deteriorating, especially in sectors with high logistics cost shares such as petrochemicals and food, agriculture and fisheries products." He added, "We will work with relevant ministries to prepare support measures that can ease the logistics burden on small and medium-sized exporters."

[email protected] Jeong Sang-hee Reporter