South Korean tire makers are tightening their belt in preparation for what is possibly the worst-ever business this year as cost is ballooning due to a surge in rubber and shipping prices, major parts of their expenses, amid the Russia-Ukraine war on top of the ongoing chip supply shortage affecting car production.

The country’s top tire maker Hankook & Company recently decided to cut the wages of its executives by 20 percent to offset the mounting cost. According to Korean financial market tracker FnGuide Inc., Hankook & Company’s operating profit for the first quarter this year is expected to fall more than 40 percent on year to 113.7 billion won ($89.6 million).

The country’s No. 2 tire maker Kumho Tire Co. reported an operating loss of 41.5 billion won last year. Market analysts forecast the company would post an operating profit of about 9 billion won for the first quarter this year, but industry observers project that could be too optimistic.

Nexen Tire Corp., which posted an operating profit of 13.2 billion won last year, is projected to swing to an operating loss of 18.6 billion won in the first quarter this year.

Shares of Hankook Tire & Technology closed down 0.69 percent at 14,400 won on Tuesday, while shares of Kumho Tire were down 0.59 percent at 4,215 won. Shares of Nexen Tire closed down 3.33 percent, at 6,680 won.

The latest challenges the tire industry is facing are the soaring natural rubber prices from Russia’s attack on Ukraine and shipping costs. Natural rubber prices account for 20 to 30 percent of tire costs while logistics costs make up more than 10 percent of sales. Shanghai Containerized Freight Index (SCFI), the spot freight rate benchmark for the industry, has jumped more than four times compared to the end of December 2019, just before the pandemic.

Although the three major domestic tire companies have raised tire prices, they are still grappling with higher costs.

The second-quarter performance of the tire majors will hinge on whether the chip shortage would ease, which affects vehicle production. If vehicle sales fall, tire sales will fall as well. The duration of Covid-19 lockdown-related backlogs in Shanghai, home to the world`s busiest container port, will also affect the tire makers’ business in the coming quarters.

By Lee Sae-ha and Susan Lee

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