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Inflation Fight Trumps Profit as Korea Leans on Refiners

Inflation Fight Trumps Profit Koreas Lee Leans on Refiners
South Korea said it will create an online exchange for oil products and increase fuel-price monitoring as it steps up pressure on refiners to bear more of the cost for fighting inflation. Photographer: SeongJoon Cho/Bloomberg

South Korea said it will create an online exchange for oil products and increase fuel-price monitoring as it steps up pressure on refiners to bear more of the cost for fighting inflation.

The exchange will open by year-end and the government may establish a futures market for oil products in 2012, the Ministry of Knowledge Economy said in an e-mailed statement today. South Korea will also scrutinize refiners to ensure they show “social responsibility,” according to the statement.

SK Innovation Co., the nation’s largest refiner, tumbled 10 percent on the Korea Exchange April 4 after making price cuts that it said would reduce profitability. S-Oil Corp., GS Caltex Corp. and Hyundai Oilbank Co. said they would follow suit after inflation breached President Lee Myung Bak’s 3 percent target for the past seven months.

"Oil refiners risk hurting shareholder value with price cuts and not even the government has the right to do that," said Chang In Whan, president of Seoul-based KTB Asset Management Co., which oversees the equivalent of $11 billion. "The government should contain inflation by using macroeconomic policies, not by controlling a couple of industries. It just won’t work.’’

The Bank of Korea raised the benchmark interest rate to 3 percent from a record-low 2 percent in four moves starting in July. It hasn’t been enough to slow accelerating inflation, which climbed to a 29-month high in March of 4.7 percent.

‘Tighten Your Belts’

“Now is the time when the government and businesses need to cooperate more than ever,” Lee said at a Jan. 24 meeting with business chiefs including SK Innovation Chairman Chey Tae Won, Samsung Electronics Co. Chairman Lee Kun Hee, Hyundai Motor Co. Chairman Chung Mong Koo. “Please tighten your belts again this year to help Korea overcome difficulties once more.”

Lee declared “war” on inflation in January and he and his ministers identified prices for oil, food, housing, telecommunications and education as areas of concern.

Posco, South Korea’s biggest steelmaker, may have delayed raising prices, even as raw material costs increased, to cooperate with the government, said Byun Jong Man, an analyst at LIG Investment & Securities Co. The market had expected the price increases to be announced by early this month, he said.

‘Inflation Target’

No decision has been made on price changes, including the timing and how much they will be increased, Chung Jae Woong, a spokesman at Pohang, South Korea-based Posco, said by telephone on April 5. Posco Chief Executive Officer Chung Joon Yang told Lee on Jan. 24 that steelmakers are “trying vigorously to help meet the government’s 3 percent inflation target,” the president’s office said.

Shin Joong Kyung, a professor at the Global Entrepreneurship Center of Hanyang University in Seoul, said Lee’s administration is "dumping" the responsibility for controlling prices onto companies. Refiners are easy targets for the government as there are only a few of them in South Korea and lowering fuel costs can deliver "fast and effective" impact for individual consumers and other industries, he said.

“The government is distorting the invisible hand of the market and meddling with corporate decisions,” Shin said. “This kind of government influence over the private sector intensifies investment uncertainties.”

South Korea’s Kospi stock index is priced at 10.82 times this year’s forecast earnings, the lowest among Asian markets except Vietnam and Pakistan.

Losing Popularity

Lee is three years into the single five-year presidential term allowed under South Korea’s constitution. His Grand National Party is seeking to bolster its popularity ahead of an election next year for members of the National Assembly after an unexpected defeat in local elections in June last year.

Lee’s approval rating has nearly halved to 36 percent since he came to power in February 2008, according to Seoul-based Realmeter’s March 28-April 1 poll that had a margin of error of 1.4 percentage point. His popularity fell as low as 16.9 percent low during protests over plans to lift an import ban on U.S. beef less than four months after taking office.

The recovery in popularity was helped by an economic rebound, driven by exporters such as Samsung Electronics, Asia’s largest maker of semiconductor, flat screens and mobile phones, and Hyundai Motor, the country’s biggest carmaker.

‘Bearing Losses’

SK Innovation will cut gasoline and diesel prices by 100 won (9 cents) per liter for three months, starting tomorrow. It may cost the company 245 billion won, or 8 percent of estimated 2011 operating profit, Lee In Jae, an analyst at KB Investment & Securities Co. wrote in an April 4 report.

“It really wasn’t an easy decision as we would be bearing losses from the price cuts,” Seoul-based SK Innovation said April 3 in an e-mailed statement. “We hope our cooperation with government efforts to control prices will help revive the Korean economy.”

S-Oil agreed to the same cuts as SK Innovation, it said in a statement yesterday while GS Caltex said it plans to lower prices and will announce details later. Hyundai Oilbank will also reduce prices by the same amount, according to an e-mailed statement today.

Shares of Seoul-based S-Oil dropped 5.6 percent on April 4 while GS Caltex’s parent, GS Holdings, fell 7.5 percent. Still, South Korea refiners have risen in Seoul trading during the last month as they benefited from disruptions to rivals in Japan following an earthquake and higher returns from processing crude oil as the global economy recovers.

‘Arm Twisting’

South Korean companies respond to government pressure because they fear retaliation in the form of probes by prosecutors and tax authorities, said Kim Sang Jo, executive director at Solidarity for Economic Reform, a Seoul-based civic group that promotes corporate governance.

“The government has so many ways to create substantial costs to companies that don’t cooperate,” said Kim, also a professor of international trade at Hansung University in Seoul. “It would be hard for companies to escape the government’s arm twisting, even if it means having to incur losses and hurt their shareholders.”

The Ministry of Knowledge Economy said state-led surveys showed the current fuel-pricing system is South Korea is “restricting competition” and sometimes results in a gap between global and domestic prices.

The planned on-line market for oil products will reflect local supply and demand, reducing the impact of volatile international fuel prices that refiners typically use as their benchmark, the government said. Under the plan, South Korean gasoline stations will be able to buy directly from the exchange.

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