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Korea Report - June 2006

Author : Hwang & Co Date : 06-07-10 09:11 Hit : 38894

Topics.

-Ruling Uri Party concede landslide victory to opposition GNP in local election.
-Korea and USA held first round FTA talks in Washington.
-More than 3,000 students were hit by food poisening through subsidized catering.
-Disgraced scientist Hwang restarts his research on human embryonic stem cells.
-Unions start habitual walkouts in June.
-2 Koreas met for economic cooperation with very little fruit.
-NK prepares to testfire ICBM and other missiles, against the warning from world.
-Korea exports in June hit a record, but trade surplus contracted due to swelling import.
-BAI concluded KEB was sold inappropriately to Lone Star Fund in 2003.
-Kumho Asiana Group selected as preferred bidder to aquire Daewoo E&C.
-Hyundai Motor’s chairman Chung granted bail after 2 months imprisonment.
-BOK raised its bench mark rate by 0.25% to 4.25% in parallel to USFR and ECB’s lift.
-Hyundai Group is desparate to secure management right of HMM.

GOVERNMENT AND SOCIETY

The main opposition Grand National Party won an overwhelming victory in nationwide local elections on May 31, leaving President Roh Moo-hyun and his ruling Uri Party in agony ahead of next year's presidential election. The GNP swept 12 out of 16 key gubernatorial and mayoral elections, through crucial battles in major cities and provinces, leaving only one to Uri. A sweeping victory for GNP dealt a severe blow to the already-embattled Uri Party. Uri Chairman Chung Dong-young stepped down after conceding a landslide victory to the conservative GNP.

Finance Minister Han Duck-soo and Education Minister Kim Jin-pyo have offered to resign, to take responsibility for the failure in economic policy, and the recent mass food poisoning at schools and policy confusion related to the high school admission system. The Cabinet change appears designed both to bolster Roh's push for key policies and to prevent his administration from falling to a "lame duck" status. His government also is losing mandate following a crushing defeat in the May 31 local elections and growing discrepancy with the ruling Uri Party.
Public support for President Roh Moo-hyun fell to 18.2%, the lowest level since the president came to the office in 2003, due to some unsuccessful "reform" measures notably in the sectors of real estate and education. The ratings for the ruling Uri party also plunged to a record all-time low of 15.1%. The president, however, remains unwavered saying that the elections prove nothing in the big picture of democracy. Uri Party, stunned by the election defeat, has been increasingly calling for the government to tone down some of the more austere laws.

Korea and USA held their first round of official talks during June 5-9 for a free trade agreement in Washington and made favorable progress. 2 countries made progress in drawing up comprehensive texts for 11 of the 15 areas covered at the first round, which was aimed at reaching a general consensus. Notable progress was made in areas such as e-commerce, telecom, financial services, trademark protection, trade competition and labor. For Korea, whose exports account for 70% of the country's GDP, greater access to its second-largest export market is critical. USA feels anxious about losing influence in Asia. Clinching a pact with Korea is also part of Washington's plan to avoid losing its economic influence in China. They, however, failed to draw up texts for 4 other categories, which included agriculture and textiles, due to their sensitive nature. US automakers want easier access to the Korean market, complaining Korea's domestic sales tax on auto imports. Korea demands to recognize products made in the Gaesong Industrial Complex in NK, as those originating from SKorea. Washington is also reluctant to open up its textile market. The financial and legal services are also delicate areas. The second round of talks will take place July 10-14 in Seoul, with further talks scheduled for Sept, Oct and Dec.
Meanwhile, about 100 activists from Korea made rallies in Washington to protest against the trade pact. US Activist groups had joined SKoreans.

The massive outbreak of food poisoning has hit 40 schools and sickened more than 3,000 students since June 16. Public health authorities say the outbreak was caused by the norovirus, but has been unable to determine where it came from. The infected students suffered from diarrhea and stomach ache. Some schools are considering bringing forward the summer vacation or rescheduling examinations.
Some 86% of school cafeterias around the nation are directly run by schools, while 15% are managed by subcontractors. The food poisoning dealt a severe blow to CJ Food System, which supplied food to those schools involved. CJ Food System, the largest provider and operator of school cafeterias, announced it is pulling out from the school meal business in the wake of the case, apologizing to the public and pledged to donate all the kitchen equipment and dining facilities to schools that it has been serving. The company took the largest share in the school food business estimated to be worth between KW280-340 bil. It operates cafeterias and provides food for 35 universities and 93 elementary, middle and high schools. A total of 102 schools halted operation of school cafeterias that have been run by the company.
The government decided to launch an integrated food watchdog system this year, amid mounting calls to streamline food safety and management currently handled by 8 government agencies, which are irresponsible and ineffective.

The government made a comprehensive policy that includes pouring KW10 tril into childcare subsidies, in a desperate effort to tackle the problem of a declining birth rate, expanding its support for childcare expenses to middle-class couples who have children aged 4 and under. Some 80% of couples will benefit from the plan by 2010, up from the current 50%. With the nation's birthrate tumbling to one of the world's lowest, the government is set to pay for education, maternity leave and a long list of other benefits. By 2020, the government aims to raise the birth rate from the current 1.08 to 1.6 that is the average of countries of the OECD.
The Supreme Court supported a transsexual's request that his new gender is recognized in official documents. A female-to-male transsexual appealed after his petition to change his gender in his family registry was rejected by 2 lower courts in 2003. The ruling is expected to serve as an important standard for future rulings on similar cases since local civil and family-registry laws have no clear definition of sex.

Disgraced scientist Hwang Woo-suk will open a laboratory in Seoul next month to resume his work on animal cloning, and seemingly restart research on human embryonic stem cells and employ many researchers who have worked with him before. Hwang left his post at Seoul National University in Dec after an investigation panel judged that Hwang's team had deliberately fabricated key data in 2 papers on embryonic stem cells. Hwang was indicted last month after prosecutors said he was the mastermind of an elaborate scheme to manipulate research results to make it look like his team had actually produced stem cell lines through cloning human embryos. If convicted, he could spend several years in jail.
Hwang's faithful private contributors had provided the funds to put Hwang back into a laboratory and appealed him to have one more chance to prove his claims. His team's reported breakthroughs in stem cell research had raised hopes to hasten the day when genetically specific tissue could be grown from embryonic stem cells to repair damaged organs or treat diseases such as Alzheimer's. The team last year produced the world's first cloned dog, which is considered one of the most difficult animals to clone.

Pak Se-ri, 28-year-old, virtually forgotten for 2 years as she coped with burnout and injuries, made sweet return, when she won McDonalds LPGA champions. It has been second return of “Hall of Fame” player, after Karrie Webb, who has gone 2 years without winning, won the Kraft Nabisco Championship 2 months ago.
Lee Seon-hwa, the 20 year old LPGA rookie, finally won the ShopRite LPGA Classic. She has finished second 3 times this year. Players of Korean descent have claimed 7 of 14 LPGA events so far this year. 9 of runner-up in LPGA Tour in 2006 are Korean, and 9 are in the top 20 money list.

From Seoul to Jeju Island, millions of people flooded about 190 major outdoor sites with waves of red to root for their national team's game in the 2006 World Cup. Red-clad supporters hit the roads, shouting "Daehan minguk! (Republic of Korea!)" and waving national flags. Korea made crushing 2-1 win in the World Cup opener in Group G, over Togo, the first ever victory in foreign sold. The team scored 1-1 draw with France and 2-0 defeat against Swiss, failing to reach the 16-nation knockout stage of the tournament.

NORTH KOREA AND NATIONAL DEFENSE

The 12th Economic Cooperation and Promotion Committee meeting between 2 Koreas were held for 4 days on Jeju Island. NK puts foremost importance in earning SKorea's provision of raw materials for its light industries of shoes, garments and soaps. SKorea's main goal is to be ensured NK's promise to carry on with the test run of the cross-border railways. Pyongyang unilaterally cancelled the original test run plan on May 25. After marathon talks, 2 sides managed to achieve a reluctant consensus that SKorea will provide some $80 mil worth of raw materials needed for NK’s light industries from Aug this year. NK will repay the loans in the form of minerals such as zinc. SKorea reaffirmed the North will not get any new economic support unless it pushes ahead with the railways test-run.

Kim Young-nam, a SKorean abducted by the North 28 years ago, reunited with his mother at the fourth round of the family reunion program at Mt Geumgang, North Korea. 82 years old mother broke down in tears on a wheel chair when her son embraced her with a smile. The son, 45, went missing from a beach in South West coast in the summer of 1978, when he was a high-school boy. NK kidnapped a number of SKorean and Japanese citizens in the 1970s and 1980s to help train spies. He is currently working in the intelligence and investigation department of the NK's Workers' Party. He brought along his 19-year-old daughter, Eun-kyoung, from his first marriage to Yokota, his Japanese wife who was believed also abducted by NK’s intelligence and NK told committed suicide. "I don't care if I die now, I want nothing more ... you look exactly the same," cried the mother, seeing long lost son. Seoul believes more than 480 SKorean abduction victims are still living in NK, in addition to nearly 600 former SKorean soldiers taken prisoner during the 1950-53 Korean War. While SKorea maintains a cautious approach in dealing with the abduction issue, Japan has mounted an intensive investigation into NK's abduction record, demanding due acknowledgement and compensation.

SKorean and US military officials have been keeping track of signs, since May, that NK is preparing to launch long-range missiles, which is believed a 35-meter Taepodong-2, which can reach as far as the US mainland. NK has reportedly stationed an additional rocket section at a launch site in a north eastern coastal town, signaling its apparent preparations for an ICBM test. Pyongyang, claiming the test launch as a sovereign right, recently offered to talk the issue over with Washington but was turned down. USA has ignored Pyongyang's brinksmanship diplomacy, insisting it will only speak to the North at the six-nation nuclear talks that have been stalled since last year. Relations between the two worsened this year after Washington clamped down on a Macau-based bank that it suspects of assisting Pyongyang in illicit financial activities, including money laundering and counterfeiting US currency. The Seoul told Pyongyang a missile launch could threaten peace and stability on the Korean Peninsula and in Northeast Asia, calling it "provocative and unimaginable" and "a betrayal" of an inter-Korean joint declaration made at the historic inter-Korean summit in June 2000. China joined USA, Japan, SKorea and Australia in telling NK to refrain from the test. USA was reported considering deploying 3-4 of the surface-to-air Patriot Advanced Capability-3 missiles on Japan's southern island of Okinawa. Separately, USA has dispatched an improved U-2S surveillance aircraft to its airbase in SKorea.

The Air Force indicated to delay the purchasing of F-15K fighter jets following an air crash, 7 months after its delivery to Korea. The US Boeing made F-15K is the Air Force's next-generation fighter jet valued at about KW100 bil a unit. The Korean Air Force is in the process of purchasing a total of 40 units by 2008 under KW5.6 tril acquisition project. So far 4 units were delivered last year. The crashed jet is one of the four. 14 additional F-15Ks will arrive in Korea by the end of this year. The aircraft crashed into the sea 48 km off the coast of Pohang during nighttime interception training along with two other F-15Ks. Its two pilots were killed in the accident.

The Navy launched the nation's first 1,800-ton class submarine, which is part of KW1.27 tril project to build 6 next-generation submarines by 2009. The Type 214 submarine has been jointly developed by HHI and Germany's Howaldtswerke Deutsche Werft AG. Currently, SKorea owns 9 German-design submarines, all diesel and electric powered, while NK possesses a fleet of 70 submarines, including 22 x 1,700-ton Romi class subs.

ECONOMY AND POLICY

Korea’s economic growth is expected to top 5% this year. The economy grew 6.1% in the first quarter on year, the highest gain in almost 3 years, backed by a recovery in domestic consumption and exports. 9 leading foreign investment banks projected the average growth rate for this year at 5.3%. Fitch maintained Korea’s sovereign credit rating at ‘A+’ with ‘stable prospect.

Korea’s exports in June hit a monthly record of $28.27 bil, up 19.2% on year, despite high oil prices and an ascending KWon against USDollar, attributing to the steady growth of the global economy, domestic pressure to cut inventories and concerns over aggravated export conditions in the latter half of the year. June imports surged 22.1% on year to $25.98 bil, contracting the monthly trade surplus by 5.6% to $2.28 bil. Exports in the first half of this year climbed 13.9% on year to total $155.53 bil, while imports rose 19.3% to $148.31 bil. The trade surplus in the first half amounted to $7.22 bil, down 40.8% on year.
Korea’s exports of information technology goods grew 8.6% in May on year, amounting to $8.74 bil, while imports jumped 12.1% to $4.80 bil.
Korea logged $1.27 bil current account surplus in May, constituting a double-digit growth in export, after posting 3 consecutive monthly deficits, such as $1.6 bil deficit in April, $430 mil in March and $760 mil in Feb. The BOK’s consumer confidence index fell to 101 in the second quarer from 109 in the first, sliped from a four-year high.

Prosecutors accused former Finance Minister Lee Hun-jai over his involvement in the controversial sale of Korea Exchange Bank to Lone Star Funds in 2003, abusing his power to facilitate the deal. The deal has been investigated because of alleged manipulation of financial records and illegal lobbying. Prosecutors plans to summon a score of officials and bank executives for questioning if they received any bribes for expediting the sale.
After a three-month inquiry, The Board of Audit and Inspection concluded KEB management deliberately undervalued the bank to facilitate the sale, by lowering the bank's BIS capital adequacy ratio and overstating its liabilities to lower the negotiating price. BAI found that the bank's evaluation of its stock prices, which ranged from KW2,610-4,350 per share, but Lone Star put the price at KW3,500-5,500 per share after conducting a due diligence. The KEB's original BIS ratio was recorded at 8.49-9.4%, far higher than 6.16% that was presented by KEB at the time of its sale. Based on its own estimate, the appropriate sale price should be around KW5,600-7,000 per share. Kookmin Bank, the nation's top lender, has been pushing to receive government’s approval to acquire a stake of up to 64.62% in KEB from Lone Star for KW6.3 tril. The Texas-based fund bought a controlling 50.5% for KW1.38 tril.

Daewoo International Corp discovered a commercially viable gas deposits of estimated 70 mil tons of LNG in the offshore A-1 block area of Myanmar near Bangladesh.
KOGAS and Oman's Oil and Gas Ministry signed a MOU in Seoul to jointly build and operate a LNG storage facility, which is expected to help stabilize Seoul's LNG supply.
SK Corp is participating the exploration of Majunga field in North West coast of Madacascar. SK holds 20% stake in the field while Exxon Mobile has 50% and BG 30%. The field is expected to reserve 420 mil barrels for daily production of 20,000-100,000 barrels.
The government dispatched ‘Onnuriho’, 1400 tons research ship, to Korea’s exclusive offshore mines near Hawaii to explore natural resources including manganese ore, where is expected a reserve of 510 mil tons.

CHAEBOL

SEC unveiled the Blu-ray disc player, heralding a new round of standard battles for the next-generation DVD technology. The world's first Blu-ray-based media player, made a debut in USA at a retail price of $999. Hollywood studios are reported to plan to produce 80% of the next-generation titles in a Blu-ray format. The next-generation DVD market is estimated at $6.6 bil in 2010. Sony plans to launch a host of Blu-ray titles this month in USA.
KT Corp and SK Telecom introduced a homegrown portable internet WiBro service. WiBro, short for wireless broadband, boasts internet speeds of 1-3 mbps while on the move at up to 120 km per hour at areas with a radius of 1 kilometer. KT began the service at high-demand areas in Seoul and the city's outskirts, and plans to expand its WiBro coverage to all parts of Seoul and surrounding cities by early next year. SK Telecom plans to invest a total of KW800 bil in WiBro by 2011.

SK Telecom is reportedly in the process to buy a 10% stake in China Unicom's CDMA-related assets, China's No 2 wireless operator, through convertible bonds for about $1.1 bil, in an apparent move to tap into the world's biggest wireless market. With 130 million mobile subscribers, China Unicom's market capitalization translates into $11.5 bil. The company recorded $10 bil in sales revenue and $623 mil in profits last year.

LG Electronics (LGE) plans to step up its China-based manufacturing in response to the soaring demand for flat screen digital TV in China. LGE Nanjing Plasma estimated its module output to reach 2 mil units in 2008 from 1 mil this year. The recent capacity expansion has made LGE the top module supplier in China this year.
LG Philips LCD signed a deal to build a panel module plant in Guangzhou as part of its globalization scheme, becoming its second plant in China following the one in Nanjing.
LG Philips LCD broke ground in Wroclaw, Poland for its new back-end module production plant, aiming to boost its market share in the fast-growing European LCD TV market. The company plans to start mass production in March next year with an initial capacity of 3 mil modules per year and expand the production capacity to 11 mil units by 2011.

The bidding for this year's largest acquisition, Daewoo Engineering & Construction, changed in the ranking of chaebols in Korea. Kumho Asiana Group, which reportedly offered KW6.6 tril for the 44% stake in Daewoo E&C, was chosen as the preferred bidder for the nation's No 2 builder. If Kumho Group, the nation's 11th largest conglomerate with KW12.98 tril in assets, acquires Daewoo E&C which ranks 21st with assets of KW5.98 tril, it would outstrip Doosan Group and leap to the No 8 spot after Hanjin Group of KW20.7 tril.

Korean builders are expected to sweep up a record level of orders abroad worth up to $14 bil this year on construction boom in the Middle East. Profitability of the construction companies is also improving as the share of value-added plants is increasing. The combined amount of overseas orders received in the first half of this year jumped 35.6% on year, already covering nearly three quarters of last year's total volume. So far this year, Daewoo E&C and HHI grabbed overseas orders amounting to $1.32 bil and $1.24 bil respectively, and Samsung Engineering, Doosan Heavy Ind. and Hyundai E&C won orders worth $910 mil, $850 mil and $640 mil, respectively.
Hyundai E&C won a $202.6 mil order from Dubai Ports World, to construct 9 buildings for a new terminal and clear a site for further expansion by reclaiming land from the sea at Jebel Ali Port. The order is the first stage of Dubai's 14-phase plan to increase the port's annual handling capacity to over 50 mil TEUs by 2030 from the current 10 mil TEUs.

Chung Mong-koo, 68, the chairman of Hyundai Automotive Group, arrested April 28 on charges of causing over KW210 bil in damages to the group through breach of trust, and embezzling about KW100 bil from the group and its affiliates was granted KW1 bil bail after a two-month imprisonment. His arrest caused a vast leadership vacuum at the company. Plans to build overseas car plants were put indefinitely on hold, while at home, sales waned. Car part manufacturers expressed huge relief since Hyundai and its affiliates purchase about a third of their goods. The Korean Federation of Industries, the main lobbyist for the country's major corporations, and Korea International Trade Association welcomed the release as a significant catalyst for the economy.
Hyundai Motor (HMC) claimed that a new vehicle produced by a Chinese automaker was a copy of it Sant Fe sport-utility vehicle, but said it would not launch any action against the alleged infringement as it was confident in the superior quality of it own product.

POSCO is putting its final touches on a new hot-rolled stainless steel mill capable of producing 600,000 tons annually in China, emerging as China's third largest maker of stainless steel after Baosteel Group and Taiyuan Iron & Steel, having invested more than $1 bil into stainless steel mill in China.
POSCO pledged to make more friends and fence around to defend itself from potential M&A threats, following the blockbuster deal between Mittal Steel and Arcelor. POSCO has bought back 2.5% of its own shares so far this year, and can buy up to 4% or more if necessary. POSCO's friendly shares currently amount to 28.7% including the stake held by SK Telecom, while foreign ownership hovers over 63%.
POSCO, the world's fifth-largest steelmaker, has expanded its capacity to produce galvanized steel, making the company the world's No 2 auto steel sheet producer. It completed in Gwangyang of its sixth "continuous galvanizing line" to produce 400,000 tons automobiles steel sheets annually, boosting its yearly production capacity of zinc-coated steel to 6.5 mil tons, emerging as the world's No 2 auto steel sheet producer.

MONETARY AND ECONOMIC INDICES

Korea’s stock price index has lost steam for a whole month, due to uncertainty of US money policy and foreigners’incessant dumping of the local stocks. It began the month at 1295, continued to fall renewing in every session the annually lowest upto 1203, threatening 1200 level, then recovered to starting point to 1295. Foreign investors sold local stocks worth KW8.3 tril since the end of April.
Kwon kept stable through the month in the box 943-961. It has once broke 960 when foreigners changed KWon to USD after sold the stocks, bur return to the level below 950. Korea's foreign exchange reserves recorded $224.4 bil at the end of June, down $330 mil from May, the first fall in 4 months, as the stronger value of the USDollar eroded the dollar-conversion value of nondollar assets.
The BOK raised its key interest rate for June by 0.25% to 4.25%, following the freeze for a third straight month up to May. US Federal Reserve raised its overnight lending rate by 0.25% to 5.25%, lifting the rate by 17th 0.25%. European Central Bank raised its bench mark rate by 0.25% to 2.75%, third rise in recent 6 months. The yield on 3 years corporate bond has gained from 4.99% to 5.31%, following the rise of bench mark rate of BOK and USA.
Korea’s consumer price gains 2.8% in June, accelerated from 2.4% in May on rising oil prices. Korea’s May jobless rate fell to 3.4%, matching a three-year low, as building and services companies hired more workers to meet increased demand.

SHIPBUILDING AND SHIPPING

Korean shipyards maintained rank No1 through No7 as of the end of May for the second consecutive month. The 7 domestic shipbuilders’ combined order backlogs amounted to 38.4 mil CGT, accounting for 35% of the global industry.
Korea Export Insurance Corp has signed a MOU with Sovcomflot of Russia to provide with better terms of insurance. As a first step, the KEIC is to provide insurance for 3 x 70,000 DWT ice-breaking tankers to be built by SHI for the delivery by the end of 2007.

Hyundai Group appears to have secured a large enough stake in HMM to fend off a takeover attempt at its shipping affiliate. Hyundai Elevator, the virtual holding firm of Hyundai Group, bought 2.3 million shares of HMM for KW51.75 bil, raising its holdings to 18.72% from 17%. HMM has been threatened as the target of takeover bid by HHI, who has insisted that its recent acquisition was not intended to seize managerial control. Hyundai Group's combined stakes in HMM currently rose to 40.54%, while HHI's side owns 31.37%. HMM recently completed the issuance of 30 million new shares, or 29% of its outstanding stock, aiming to increase Hyundai Group's stake. The struggle erupted in late April when HHI bought a combined 26.68% stake in HMM from Fredriksen to emerge as the single-largest shareholder. Hyundai Group is now headed by Hyun Jeong-eun, the widow of the late founder’s fifth son, Chung Mong-hun, who committed suicide in early Aug 2003, and HHI is owned by Chung Mong-joon, the sixth son.
The creditors of Hyundai E&C, who holds 8.7% in HMM, plan to put it up for sale later this year. Hyundai Group and HHI have reportedly sought to take over the contractor, because of its stake in the shipping company, as well as the flagship image of Hyundai Group. Hyundai E&C, which owns 8.69% of HMM decided to participate in HMM’s new share sale which is being made amid a takeover tussle among shareholders.