South Korea to Raise Power, Gas Prices for First Time in More Than a Year
South Korea will raise power and gas prices for the first time in more than a year, adding to inflation and increasing pressure for a further increase in interest rates.
Electricity prices will rise in August by an average 3.5 percent amid higher fuel costs and losses by state-run utilities, the Finance Ministry said in a statement today in Gwacheon. Gas prices will climb by an average 4.9 percent in September.
The increases are the first since June 27, 2009, and follow decisions by India and Malaysia to cut subsidies on fuel prices amid elevated energy costs stoked by the Asia-led global recovery. Both Korea Electric Power Corp. and Korea Gas Corp. reported wider-than-expected losses this month due to a weaker won, energy costs and government-controlled tariffs.
“The increase should push inflation higher, which may reach 3 percent later this year,” Park Sang Hyun, chief economist at HI Investment & Securities Co. in Seoul, said before the announcement. “The central bank may have to raise interest rates again as early as August.”
Shares in Korea Electric Power fell 1 percent to 33,250 won as of 1:23 p.m. in Seoul trading ahead of today’s announcement, while the benchmark Kospi index declined 0.8 percent. Korea Gas declined 1 percent to 44,300 won.
The won was little changed at 1,183.1 per dollar as of 1:23 p.m. in Seoul, according to data compiled by Bloomberg. The currency has weakened 6.3 percent in the past three months, Asia’s worst performance.
Price Pressure
The increase in power and gas prices will add about 0.1 percentage point to inflation, Finance Ministry Director General Yoon Jong Won said today. South Korea’s consumer prices rose 2.6 percent in June from a year earlier, and Yoon said inflation would accelerate to more than 3 percent in the fourth quarter.
South Korea’s $929 billion economy approached “its potential output level” and may face inflation pressure, Central Bank Governor Kim Choong Soo said on July 9 after raising the benchmark rate to 2.25 percent from a record-low 2 percent, the first increase since the global financial crisis.
The economy grew a faster-than-expected 1.5 percent in the second quarter, while industrial output beat estimates by gaining 16.9 percent in June from a year earlier. Companies from Samsung Electronics Co. to Hyundai Motor Co. reported record earnings for the three months to June, helped by a weakening won that boosted export competitiveness.
The central bank forecast this month that consumer prices will rise 2.8 percent this year, compared with the previous estimate of 2.6 percent, and 3.4 percent in 2011. The bank is targeting inflation of between 2 percent and 4 percent on average through 2012.
The Finance Ministry forecasts 2.9 percent inflation for 2010, and Yoon said the prediction already reflected the increase in power and gas prices.
Power Rates
Power prices for households will increase by 2 percent, while those for industrial users will rise by 5.8 percent, the ministry said. Electricity for overnight delivery will climb 8 percent.
Coal at Australia’s Newcastle port, an Asian benchmark, has climbed 11 percent to $96.10 a metric ton this year while liquefied natural gas import costs jumped 37 percent from a year earlier.
Elevated energy costs contributed to losses at state-run Korea Electric Power that exceeded analysts’ estimates. The utility lost 814.8 billion won ($675 million) in the second quarter, compared with a profit of 239.8 billion won a year earlier. Korea Gas had a wider-than-expected loss of 81.7 billion won over the same period.
The electricity price increase may boost Korea Electric Power’s annual operating profit by 700 billion to 800 billion won, Yoon said.
Electricity prices were raised by an average 3.9 percent and gas prices by an average 7.9 percent on June 27 last year.
The government has been keeping a tight lid on utility costs in a bid to support small firms and low-income earners, HI Investment & Securities’s Park said.
To contact the reporter on this story: Shinhye Kang in Seoul at skang24@bloomberg.net; Eunkyung Seo in Seoul at eseo3@bloomberg.net
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