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Korea Report - September 2003

Author : Hwang & Co Date : 03-12-19 15:51 Hit : 54477

* Topics

- President Roh left ruling party MDP.
- Typhoon "Maemi" hit the peninsula, leaving severest damages to the country.
- USA requested Korea to dispatch a substantial size of combat troops to Iraq.
- Korea's export to China surged.
- Asian currencies got stronger against USD.
- Korean shipbuilders were hit by typhoon.
- Korea yard suspended offer for 2007 delivery new building.
- Hyundai Samho became the biggest share holder of HMD.
- Chung Sung-Lip reelected as president CEO of DSME.
- Korean owners starts to order new building.

* Government & Society

Ending months of acute factional feuding to reach a compromise to revamp the party, a liberal group with about 40 lawmakers bolted from ruling Millennium Democratic Party to shape a new political force in support of President Roh Moo-hyun's reform agenda. President Roh, who ascended to the top of the nation on the ticket of the ruling MDP, is to disavow his affiliation to the party, expressing his support for the new political party, while MDP declared that it is no longer the ruling party to support President Roh.

The majority opposition party voted to oust Home Affair Minister, Kim Doo-kwan, for his failure to prevent recent intrusion into a US base by student activists, against President Roh's strong appeal to keep him. President Roh appointed Marine Affairs Minister, Huh Sung-kwan, as the new Home Minister, and promoted Choi Nak-jung, vice minister of marine affairs, to the minister.

The National Assembly rejected the presidential nomination of Yoon Sung-sig, a professor who served in Roh's presidential campaign and transition teams, as new chairman of the Board of Audit and Inspection, serving another political blow to Roh. President Roh decided to depart from MDP in a bid to avoid political disputes over his party membership, leaving the country with no legal ruling party for the first time in its history.

A powerful typhoon "Maemi" pounded Korea with down pouring rain of 30 mm per hour and the registered velocity of 60m/sec, the highest in Korean history. It caused floods, landslides and power outages in mostly southern and eastern coastal regions. 1.4 mil households suffered from power failures, 317 hectares of farmland inundated, many roads, railways and highways flooded, with the death toll more than 120 and estimated the damages topped KW4.78 tril. Oil refineries stopped the operation, and ports and shipyard, which are mostly located in the southern coast, experienced severe damages. The government designated all regions hit by typhoon, excluding Seoul and Incheon, as special calamity zones, where victims will receive more state compensation.

Government's new draft plan for labor policy calls for making easier for corporations to close their business and mobilize substitute work forces during strike. It includes improvement of contract terms for irregular workers from the current one year to 2-3 years. The labor union immediately charged that the plan one sidedly favors business and undermine labor rights. JP Morgan welcomed, commenting that unless government sticks to the approach, current labor market dynamics could undermine Korea's economic prospect. American Chamber Commerce recommended Korea to set forth to solve 3 dominants problems in Korea's labor system, such as the militancy of union, the lack of labor flexibility and rising labor costs. Top EU's trade representative raised skepticism about Korea's ambition to be the NE Asian logistic hub, citing the strikes by truck drivers.

Average monthly wages during the first half this year jumped 10.6% on year to KW2.06 MIL ($1.748), while workers put in fewer hours at work. A recent study by FKI revealed that when labor cost goes up 1%, the inflow of foreign investment is reduced by 5.73%.

* North Korea & National Defense

Even though the talks ended without even a joint statement to resolve the issue, Korean political circle expressed their satisfaction on the 6 nation's 3 days negotiation over NK's nuclear ambitions in Beijing at the end of Aug, citing that it laid the groundwork for peaceful solution on 10 month old dispute. US representative, James Kelly, commented it was a "productive start" for the very long way to travel, still demanding "complete, verifiable and irreversible" dismantlement of the nuclear program.

USA has officially requested Korea to dispatch a batch of 3000-10,000 combat troops to Iraq and command a division consisting of multi-national forces. Government is likely to accept the request in consideration of the security alliance between 2 countries and nuclear standoff between USA and NK, despite growing opposition from civic groups. A leader of Parliament commented that National Assembly would approve sending troops to Iraq if USA receives an authorization from UN on multi-nation's participation in security control in Iraq. A survey revealed that 58.6% of people supported the dispatch under UN's approval, while 40% rejected the idea. A team of 12 inspectors left for Iraq to assess the feasibility of Korea's dispatching combat troops to Iraq as requested by USA.

The Seoul District Court convicted 6 key figures of former President Kim DJ government for their involvement in an illegal secret money transfer to NK just before the 2000 inter- Korean summit, accusing them of violating special law on economic crimes and abusing their official authorities. The court however suspended jail sentences, considering their commitment to carry out the summit for the peace and unification of Korean Peninsula.

* Economy & Policy

The aftermath of typhoon could further hurt household spending and investment, amid fears of a slowdown in the nation's economic growth. Fitch predicted Korea's economic growth less than 2%, as the first institute to forecast the growth in 1% level. A Korean think tank forecasted 2.7% less than half of last year's 6.3%. Korea's real GNI in first half edged lower to 0.8% on year, with the first semi annual decline in more than 4 years caused by worsened trade conditions and economic slump.

Korea's export posted $15.48 bil in Aug, 10.9% up on year, as 3rd straight month increase, recording trade surplus of $1.93 bil. Korea held a 2.6% share in the world top 100 export markets, as of end 2002, up from 1.9% in 1992, while China's share nearly doubled to 7% from 3.7% and Japan's fell to 6.5% from 9.3%. Korea's exports of IT products increased to all time high of $5.1 bil in Aug, up about 30% on year, driven by brisk sale of semiconductors and handsets, which is about a third of total exports of $15.48 bil.

Korea's export to Asian market came to $57.29 bil between Jan 1 - Aug 20, about 50.7% of country's total exports, thanks to surge of shipment to China. The portion of exports to China rose to 17.5% from 14.6% in 2002, while percentage of export to North American markets fell to 18.9% from 21.6% and USA's slipped to 17.6 from 20.2%. Korea's export of semiconductors to China reached $757.89 mil, 2.2 times on year in the first 7 months of this year. Between Jan 1-Aug 20, Korea's trade deficit with Japan totaled $11.56 bil, likely posting its highest ever trade deficit this year, with export and import at $10.24 and $21.8 bil, respectively.

Foreign direct investment in Korea has been declining for past 4 years and dropped from $15.22 bil in 2000 to $11.29 bil in 2001, $9.1 bil in 2002 and $2.66 bil in the first half of 2003. Foreign purchase of Korean stock hit KW9.11 tril in 4 months since May, reflecting a "Buy Korea" boom, lifting the KOSPI to around 770 from 560 in April. Foreign ownership in local stock market reached historical high, to 38% of total market capitalization worth KW120.18 tril, as of end Aug.

Korean government took the steps to ease concerns over rising value of KWon against USD, after it tumbles to a 34 months low at around 1151 on the news that G7 Finance Ministers called Asian nations for more flexible exchange rates. Government indicated to issue additional foreign currency stabilization bonds of KW3-5 tril. US business leaders, at the 2 days conference in Korea, called for the rise of KWon upto 10% after their demand to China to raise of the yuan value by 25%. A sharp rise in JYen overshadowed the outlook for Japan export reliant economy, despite robust growth of export to Asian countries. JYen rose to 110 level against USD, the highest since Dec 2000.

Government set to sell about 37% out of its 87% stake in Woori Bank, the third largest financial service company in Korea, by the end of this year. Lone Star, US investment fund, which bought a 51% stake in Korea Exchange Bank, 5th largest lender in Korea, unveiled its plan to set up its nerve center for Asian operation in Korea in near future.

Hana Bank plans to sell a more than 25% stake worth some $816 mil to investors including Shinsei Bank, a Japanese bank owned by US private equity fund Ripplewood.

Shinhan Financial Group listed its shares at NYSE, becoming 6th Korean company on it.

Goldman Sachs has growingly been in suspicion that it may have intentionally released an upbeat analyst report about Kookmin Bank to raise the share price of the nation's biggest commercial bank, before it sold its stake in the local lender. GS upgraded its recommendation for the bank from 'market perform' to "Out perform" just 6 days before it unloaded a 3.96% stake at KW43,350, bringing to double the amount it paid 5 years ago.

Korea, Japan and China agreed to promote open source software and platforms that favors non-Microsoft program like Linux, in a move to reduce heavy reliance on Microsoft's operating system and to put a new spin on the software sector in Northeast Asia. They also agreed on joint research and cooperation in 7 information technolology fields as part of efforts to run Northeast Asia into global IT hub.

Government resumed its long suspended export financing to Russia, by agreeing that $2.24 bil worth of principal and interest payment owed by Russia from the loans given by Korea in 91, would be paid over next 23 years with the rest being written off. Export financing was suspended since 92 as Russia failed to honor its payment obligation.

* Chaebol

Korea's major chaebols found difficulties to draw their business plans for next year, because of the uncertainties they are facing, such as fluctuation of USDollar value, NK's nuclear weapon's program, murky outlook for domestic economy, introduction of 5 day workweek system and inconsistent government policies. Korea Chamber of Commerce posed a constitutional challenge to the Fair Trade Law which prohibits local chaebols equity investment into other companies from exceeding 25% of its assets, saying that it is against constitutional principle of the minimum restriction of people's basic rights. Fortune magazine ranked 13 Korean firms in its 500 global firms, including Samsung Electronics at 59th, Hyundai Motor 94, SKCorp 108, Samsung Corp 115, LG International 205th etc.

SEC and LGE, Korea's 2 electronics giants, are fast expanding their presence abroad by diversifying their strategy, relying on conventional publicity campaigns at sports events as well as sponsorship in education and culture program. SEC, world second largest semiconductor maker, has developed the world's first 4 gigabyte flesh memory chips, doubled the capacity of its largest model, expecting the market to jump to $16 bil by 2007 from $3 bil in 2003. Korea's semi-conductor export to USA and Europe are suffering after 2 markets decided to impose tariffs on Korean memory chips, sharply declining to $2.01 bil to USA in Aug, 17.7% contraction on year and the lowest volume since 93. Korea becomes IT superpower, as Korean made IT products, ranged from mobile phones to monitors, from game software to security solutions, are enjoying explosive popularity in the market around the world, expecting the export this year to reach $54.88 bil, compared with $38.31 bil in 2001 and $46.04 bil in 2002.

SK Global, the trading arm of SK Group, changed its name to SK Networks, in a move to shake off its negative image associated with its accounting scandal. Upto 98% of foreign creditors of SKN, to whom SKN owes about KW830 bil, have agreed on debt buyout plan at 43 cents per dollar owed. SKCorp Chairman, Chey Tae-won, plans to contribute around KW100 bil to help salvage SKN.

SK Corp, Korea's largest refinery, plans to inject $165 mil into Singapore based SK Energy Asia and $55 mil into UK based SK Energy Europe, and is to set up a joint factory in Shanghai, with the annual production capacity of 60,000 tons of solvent on 50- 50 basis with SINOPEC, in a bid to expand its international operations.

Hyundai Motor saw its share in the domestic market hit its highest level ever in Aug, selling 46,070 cars, 53.4% of total car sales in Korean market. Kia followed with 18.6%, GM Daewoo 10.8% and Ssangyong Motors 9.6% and Renault Samsung 7.6%. HMC opened its R&D centre in Russelsheim, Germany, in an effort to boost sales in Europe. Kia Motor secured the market share of 1% in European market, the highest since its advance into the market in 91.

* Monetary & Economic Indices

KOSPI started the month at 760, rose to 766, the highest since July 2002 thanks to accelerated growth of US consumer spending and manufacturing, then dived to 695 at the end of the month, first time below 700 in 2 months, due to foreigners' continued selling. Korea's main bourse ranked 14th among 47 members of World Federation of Exchanges in terms of the number of listed companies (686), 15th in capitalization with $268 bil and 13th in its trading volume at $289 bil as of end Aug.

Under the pressure from USA and Europe, KWon strengthened to 1150 against USD on Sept 20, the strongest in 14 month, from 1175 at the beginning of the month, then remained stable at 1150 level in the rest of the month on speculation that BOK would sell the domestic currency in order to stem further gains. Korea's forex reserve reached $138.09 bil as of 15th Sept, $1.9 bil up from end Aug. Korea's external liabilities rose $14.4 bil from the end of 2002 to $159 bil in June, while country's credit holdings are also increased by $15.4 bil to $199.4 bil.

The unemployment rate in Aug inched down by 0.1% to 3.3% from July, but remained 0.3% higher on year. Korea's consumer price jumped for second consecutive month to 3.3% on year and 0.9% on month, mainly due to poor harvest of fruits and vegetables on frequent rainfall in this summer and typhoon Maemi. Yield on 3 years corporate bonds kept falling through the month in the course of 5.6-5.14-5.08-5.03-5.0%.

* Shipbuilding & Shipping

Typhoon "Maemi" hit the yards leaving severe damage. A FPSO in HHI cut the anchor chain and drifted to hit a PC and water break in HMD. DSME has experienced hardest blow with two LNG had water entered into gas containment area, 2 other LNGs, Container ship and VLCC's side shells torn to replace hundred tons of steel, and 1 units of jib cranes collapsed. In Koje Island, all yards have power cut for a few days and hundreds of welding machines submerged in the water. A 37K PC in ShinA ran against the ground during the preparation of delivery.

Korean yards are facing a pleasant headache, as the predelivery installments have flowed in in excess of their actual usage due to the huge scale orders. HHI received KW3.39 tril in 2003 compared with KW1.96 tril, and SHI was paid KW1.9 tril vs KW790 bil. Their headaches have been added when the banks do not allow them to repay their facility loans earlier. Korean yards have suspended issueing their offer for the 2007 delivery new building, because of uncertainties in cost factors, such as foreign exchange situation, the material price and labor cost.

HHI signed the contract with Yangming for 4 x 8000 TEU, Zodiac Maritime 5 x 6800 TEU, HCI Holding 5 x 7750 TEU, K Line 5 x 5624 TEU, Nordcapital 2 x 2566 TEU container carriers, Tsakos Energy Navigation 2 x Suezmax ice class, Western Petroleum 3 x 116K 1A ice class tankers. HHI started a new hi-tech submarine plant with advanced machining and assembly equipment, expecting operation from fist quarter 2004.

HMD agreed with OMI to build 1 x 37K PC ice class, Schoeller 2 x 35K PC, Tsakos 4 x 2824 TEU and Suisse-Atlantique 2 x 2800 TEU container ships.

Hyundai Samho secured orders from KG Jebsen for 2 x 159K coated tanker, Erck Rickmers-Nordcapital 5 x 8200 TEU. Samho has purchased HHI's 27.7% stake in HMD, becoming biggest share holder of HMD.

DSME's BOD reelected Chung Sung-lip as president CEO of the company. DSME contracted with Golar for 1+1+1 x 145K LNG and Kristen Navigation 1+1 x 145.7K LNG carrier. DSME has also won a KW130 bil order to build a 4,500 tons destroyer worth KW130 bil for Korean Navy on the delivery of 2007.

SHI agreed with CP Offen to build 5 x 8000 TEU container ship. SHI is to build a customers' complex, consists of 282 houses and 80 rooms hotel near to yard in highest living standard, expecting completion in 2005.

Hanjin won an order from Rickmers Reederei to build 4 container ships of 5,060 TEU and Peter Dohle 4 x 3400 TEU.

STX's board meeting decided the promotion of executives, including Kang DS as Chairman, Jang WG V Chairman and Kim SK President CEO. STX agreed with Bernhard Schulte to build 2 x 2600 TEU container ships, Pietro Barbaro 1+1 x 51K PC, Parakou 3+2 x 51K PC and Sun Enterprise 2 x 45K PC.

ShinA contracted with Navigazione Motanar for 2 x 25K PC. Daesun signed agreement to build 2 x 950 TEU feeder for Namsung.

Reflecting booming atmosphere in shipping industry, thanks to increased volume of transportation with improved freight charge, favorable exchange rate and lower interest rate, major shipping companies started to order new buildings, for the first time since IMF forex crisis. HMM committed for the long term employment of 5 x 6800 TEU which Zodiac Maritime will build in HHI for the delivery of 5/11/2006. It also consider to build 2 units of 300K VLCC. Hanjin plans to build 4-5 units of 6000-7000 TEU container ships.

Korean government plans to eliminate the port entrance fee for transshipment cargoes at Busan and Gwangyang from Oct 1st, in a bid to help domestic ports, suffering from sluggish business in the wake of truck drivers strikes and recent typhoon. Busan Port has lost its key customers, such as China Shipping, Evergreen, Mediterranian Shipping, Maersk Sealand and OOCL, increasingly turn to direct sea route to Chinese ports.

Best Regards,