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The country's benchmark KOSPI closed down 0.95 percent, erasing initial gains after investors continued to unload stocks, citing concerns about South Korea's export-driven, import economy facing lingering global financial uncertainties and soaring energy import costs.
After dipping below the 1,600 mark in late afternoon trading, the index ended at 1,600.26, a drop of 15.36 points from the previous session, after shedding 2.6 percent on Thursday which marked the largest one-day drop since early last month.
The recent losses were led by steel and chemical companies that depend on raw material imports and fuel-consuming airlines, reflecting investors' concerns about their mounting import costs.
The country's flag carrier Korean Air Lines was down 5.5 percent on Friday, completing a three-day fall of almost 20 percent. Korean Air's fuel costs are expected to jump this year due to soaring oil prices. Its fuel cost rose 9.9 percent in 2006 to 2.61 trillion won (US$2.7 billion), accounting for 32 percent of total expenses.
POSCO, the world's fourth-largest steelmaker, plunged 4.12 percent on Friday after suffering a 6.21-percent drop on the previous day. Hyundai Steel, the country's second-biggest steelmaker, also extended its losses, falling 4.72 percent. Dongkuk Steel also shed 4.74 percent.
The steelmakers are suffering from sharp increases in import prices for raw materials such as iron scrap or iron ore. "Crap price jumped 35 percent so far this year after soaring nearly 50 percent last year," a POSCO official said.
As steelmakers have raised their product prices to reflect higher raw material costs, the country's shipbuilders are struggling to cope with the high prices of steel plate.
According to Seoul's industry ministry prices of steel plate jumped 40.3 percent in February from a year earlier. The prices are likely to remain strong as shortages would persist in Asia because of demand from shipyards in China.
South Korea is home to the world's top three shipbuilders, Hyundai Heavy Industries, Daewoo Shipbuilding and Marine Engineering and Samsung Heavy Industries. Their shares have continued falling with investors' fears about higher raw materials costs.
South Korea's energy companies are also suffering from high crude import prices, with the business outlook bleak.
Stocks in SK Energy, the nation's largest refinery, dropped 5.19 percent on Friday. Its shares have fallen about 40 percent so far this year. South Korea's largest chemical maker, LG Chem, extended its losses on Friday with a 3.18 percent down. Honam Petrochemical Corp also dropped 2.35 percent.
The chemical makers are considering cutting operations at their naphtha crackers due to high naphtha prices with sluggish ethylene demand. Naphtha is the feedstock used to produce ethylene and propylene.
Asian naphtha's outright prices are over US$910 a ton this month, a 40 percent rise from a year earlier, according to the industry ministry. But the price of ethylene has dropped lower than US$1,200 per ton on a supply glut and sluggish demand, weakening their margins.
The prices of Dubai brand crude oil, South Korea's benchmark, jumped 61 percent in February, compared with a year earlier, dealing a major blow to the energy-poor country. The Dubai crude price settled at a new record of US$99.03 a barrel on Thursday, up from $89.3 a barrel at the end of December, according to state-run Korean National Oil Corp.
South Korea, the world's fourth-largest oil importer, is vulnerable to rises in energy prices because it imports 97 percent of its energy needs from overseas.
With galloping energy and raw material prices, economists are increasingly pessimistic about the outlook for the South Korean economy this year, with some even predicting that the growth rate may tumble to below 4 percent, falling short of the government's target of 6 percent.
"Seoul shares could continue their slip to the 1,500 point-level amid fears of a global economic downturn," said Lee Jong-woo, a researcher at Kyobo Securities, adding that a slowing U.S. economy means weaker demand and tighter margins for exporters in South Korea.
In the face of the warning signs, the South Korean government has decided to offer loans of 20 billion won to local importers of raw materials. It is also considering cutting tariffs on raw materials imports, according to government officials.
