Won-dollar rate hits highest level since 2009 amid war fallout; small firms lack hedging tools; furniture and paint sectors also squeezed

Small manufacturers are struggling as the won-dollar exchange rate surpasses 1,560 won. Pictured is the interior of Shinhwa Industries' factory. [Shinhwa Industries]
Small manufacturers are struggling as the won-dollar exchange rate surpasses 1,560 won. Pictured is the interior of Shinhwa Industries' factory. [Shinhwa Industries]

"We just received an official notice that tool prices will rise another 30 percent next month. At this rate, we're basically running at a loss."

Kim Jin-woo, chief executive of hydraulic cylinder manufacturer Shinhwa Industries, said the prolonged high exchange rate has made running his business increasingly difficult. Carbide cutting tools are essential for producing precision hydraulic cylinders, and those tools rely on imported tungsten — meaning their price climbs in lockstep with the won-dollar rate. "The tools wear down with every cut, and the costs keep rising month after month," Kim said. "Imported raw materials are up more than 20 percent, and on top of that, fuel and electricity prices have gone up too — it's getting really hard to keep the business going."

According to the Bank of Korea, the won-dollar rate surpassed 1,560 won during overnight trading on June 6, its highest level since the global financial crisis in 2009. This year's average rate of 1,477.06 won has already exceeded last year's record annual average of 1,420.97 won. The combination of rising global oil prices and a persistently weak won is pushing small manufacturers into a crisis — particularly smaller firms that rely on imported raw materials to serve the domestic market.

Unlike large conglomerates, small and medium-sized enterprises lack dedicated staff and financial instruments to hedge against currency swings, leaving them fully exposed to a weak won. Rising production costs are outpacing their ability to pass increases on to customers, rapidly eroding operating profit. A survey of 410 small and medium-sized enterprises conducted last month by the Korea Federation of SMEs found that 94.6 percent said their cost burden had grown since the outbreak of the Middle East war. One in three — 35.6 percent — reported that their raw and subsidiary material procurement prices had risen by 40 percent or more.

CD&N Korea, a small LED lighting manufacturer, is also feeling the strain. Chief Executive Kim Na-gyeong said imported raw material prices have doubled compared with a year ago. Because small manufacturers typically cannot pass higher costs on to their supply contracts immediately, profitability has deteriorated sharply.

Rising exchange rates and higher logistics costs have also destabilized materials procurement planning, making it harder to forecast production costs. "The construction market is in a slump too, so it's hard to find new sales channels — we can't raise prices," Kim said. "We're absorbing losses just to hold on, out of consideration for our customers."

Beyond small manufacturers, the furniture and paint industries — both heavily reliant on imported raw materials — are also suffering. The situation is compounded by a naphtha shortage triggered by the Middle East war, on top of the surging exchange rate, making an earnings hit all but unavoidable. Furniture companies are affected not only by the cost of imported materials but also by shipping and logistics expenses, which are sensitive to exchange rate movements. Paint makers similarly depend on imports for most of their key inputs.

"Even though sales are roughly flat, our operating profit keeps shrinking because of the high exchange rate," said an official at a furniture company. "We manufacture in China, and because the products are bulky, logistics and shipping costs are heavily affected by the exchange rate as well."

The paint industry faces a similar predicament. Domestic paint makers rely on imports for a significant share of their raw materials, meaning simultaneous rises in oil prices and the exchange rate create a double burden. "The second half of the year is what worries us most," said an industry official. "From the second half onward, products will be made from materials purchased at higher prices — not from existing inventory. If we can't raise our selling prices, the more we sell, the more we lose."


boo@heraldcorp.com