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Korea Report - November 2004

Author : Hwang & Co Date : 04-12-23 14:12 Hit : 45392

Topics.

-ASEAN+3 agreed to set FTA in the area covering 2 bil of population.
-Korea began commercial production of natural gas.
-Korea, China and Japan agreed joint effort against exchange rate and energy supply.
-GDP growth forecast lowered to 4% level.
-Export hit all time monthly high, while consumer confidence kept falling.
-All out war started among global electronic giants.
-KEPCO won the approval to import LNG.
-KWon relentlessly strengthened, and forex reserve hit new high.
-BOK cut its call rate by 0.25%, while FRB raised .
-Profitability of Korea shipyards eroded by triple obstacles.
-Shipbuilding contract, at last, had a price escalation clause with cost of steel.
-Golar LNG expanded its investment in leading Korean shippers.
-STX completed the purchase of Pan Ocean.
-HMM expanded tanker fleet.

GOVERNMENT AND POLICY

President Roh Moo-hyun visited South America and met the leaders of the countries. He agreed with Argentine to take specific steps to boost economic exchanges and consolidate cooperation on energy resources, with Brazil to upgrade bilateral ties to facilitate mutual exchanges in various areas including trade, energy and information technology, and with Chile to take a leading role in enhancing cooperation between Asia and South America, deepening bilateral ties in various fields.
Korea has become the 47th member of the Inter-American Development Bank (IDB), as the second Asian nation to join the IDB after Japan granted in 1977.

President Roh held summit meeting with the premiers of China and Japan in Bientian in Laos to agree joint effort to cope with the exchange rate of their own currency against USDollar, and to strike a deal that would allow them to make joint purchases of crude oil.
ASEAN plus Korea, China and Japan agreed to establish a Free Trade Area, named EAFTA, which could be comparable with EU and NAFTA. The area is covering more than 2 bil of population.

The ruling Uri Party celebrated its first anniversary, putting behind it a tumultuous year with a surprising general election victory followed by tumbling popularity soon after. The most recent survey found only 22.4% supported President Roh, and 23.2% the Uri Party. Both figures were the lowest rates since the inauguration of the Roh administration and the launch of the party, respectively.

An unauthorized Korean Government Employees Union launched an indefinite general strike, under the support of nation’s most militant union group, Korean Confederation of Trade Union, to protest the government’s policy restricting public servants from 3 major labor rights, including collective bargaining. Government kept its unwavering hard-line stance against looming labor strife by civil servants who are not allowed to strike by law. The unprecedented walkout by civil servants was seen losing steam soon, as an increasing number of member returned to work with no public support. Government reaffirmed that the active participants, more than 2000, would be heavily penalized including dismissal.

Japan's top court finally rejected demands for compensations by a group representing SKoreans forced into prostitution or conscript-xed by the Japanese military before and during World War II.
The relation between China and Japan has become chilled, when Japan includes China in the threatening factors in its Overall National Defense Plan, while Chine expands its Nanjing Museum on Japaese massacre during WWII. The meeting between the premiers of 2 nations was cancelled.

Liquor imports declined 17% on year to $194.88 mil this year, for the first fall in 6 years, due to the sagging economy.
Judicial reform committee announced its plan that citizens with no legal training will participate as jurors in the judgment of criminal cases in Korea from 2007, and a formal jury system is to be adopted by 2012.

NORTH KOREA AND NATIONAL DEFENSE

For the first time since the Korean War ended in 1953, SKorean troops took over patrol duties from the American-led UN Command at Joint Security Area in the heavily fortified DMZ. The military is to spend KW99 tril on modernizing weapons by 2008 to pursue a defense capability that is less dependant on US forces. Government ruled out a possibility that SKorean troops in the northern Iraqi city of Irbil would be engaged in combat or public security missions during Iraqi national election in Jan.

Experts concern that the resignation of U.S. Secretary of State Colin Powell, regarded as the voice of moderation and restraint within a hawkish administration, signals that reelected President Bush would further strengthen his unilateral and hard-line foreign policies, likely applying more pressure on NK to abandon its nuclear program, leaving little room for SKorea to bring the 2 parties toward a compromise. The International Crisis Groups report on NK over its nuclear weapons program, argued that its freeze of nuclear activities is no longer an option because the North must now have 8-10 nuclear warheads. Since Iran stopped its Uranium enrichment program, NK became focused by international concern on nuclear matter.

Badges and portraits depicting NK’s leader Kim Jong-il have been disappearing from people's chests and walls of offices in NK, likely to conceal the excessive exposure of the personality cult in the society. 70 NKorean defectors captured by Chinese authorities last month were repatriated back to NK. The EU released nearly $8 mil in aid for NK. Government gave Woori Bank the green light to set up a branch at an industrial complex being built in the NK border city of Gaeseong.

ECONOMY AND POLICY

Government admitted its 5% growth target might be missed, saying GDP expanded 4.6% on year in 3rd quarter, after rising 5.5% in 2nd quarter. Woori Bank cut its forecast for Korea’s 2004 GDP growth rate to 4.9% from an earlier 5.3%, citing higher oil prices and weakening exports. It also lowered its prediction for 2005 economic growth to 4.4% from 5.3%.

Being led by ships, mobile phones, cars and semiconductors, Korea's exports in Nov hit all time monthly high for the second straight month, climbing to $23.31 bil, marking an on-year increase of 27.8%, despite the strengthened KWon. Import also hit a record-high on oil and material cost soaring to $20.54 bil, up 30.3% on year. Korea's crude oil bill in Oct rose 54% from a year earlier to $3.03 bil, as the average price of crude oil imports rose to $40.28 a barrel from $27.69 a barrel.
Korea's exports of information and communication technology products reached a monthly record of $6.83 bil in Oct, driven by strong sales of semi conductors and wireless telephon equipment. Korea-made online games are a sensation overseas, with this years export to reach as high as $250 mil.
Korea's consumer confidence fell in Oct for the fifth time in 6 months to 88, down from 88.9 in Sept, the latest sign that domestic demand will continue to be a big drag on Asia’s third-largest economy.

KWon has kept sharply strengthened against the USDollar through the month. When US Treasury Secretary suggested markets are the best determinant for the trade of USD, the exchange rate of Kwon dipped below the psychological barrier 1,100, and after Greenspun of US FRB stressed the inevitability of weak USD, it has helplessly tumbled down with no end sight, shruging off Korean government’s attempts to cool off KWon and President Bush’s confirmation on his support of the strong USD.
KWon's sharp appreciation against USDollar, from 1200 at the beginning of this year to 1047 at the end of Nov, knocked down local exporters profitability with small and midsize companies more vulnerable. The experts projected that a 10% appreciation of the local currency will trim exports by $12 bil and increase imports by $3.6 bil over the next 4 years, and export profitability deteriorated by 1.19% down at 1% strengthening.

China's consumers' price index fell to 4.3% from 5% level in past 5 months, indicating green light for soft landing of its economy. China is still facing the shortage of energy supply and difficulties in transportation, despite its strenuous efforts to expand the industry in energy exploration and transportation network.
Japan's GDP growth in third quarter reached only 0.3% from 2nd quarter, far lower than expected 2.1%, mainly due to interest rate hike, decrease in corporate investment and soaring energy/material cost.

Dividend payments to foreign investors are likely to top KW3 tril this year, compared KW2.7 tril in 2003, KW2.1 tril in 2002 and KW1.25 tril in 2001.
ING Life Insurance Korea aims to capture No.3 position within next 3 years in Korean market, currently dominated by 3 local giants, Samsung, Korea, and Kyobo, with nearly 69% of market share. ING ranked fourth with a share of just 4.9% at the end of Aug.
Fidelity Investments, the worlds largest fund-management company, is to establish a subsidiary in Korea, setting up a KW10 mil company in the country to start operation from 2005. HSBC is to acquire the First Bank for KW3-3.5 tril, following Citi Group purchased KorAm Bank, accellerating the pressure for the M&A and intensifying the competetion among local banks.

CHAEBOL

Political bickering appears likely to derail the government’s plan to revise the fair trade law before the end of this year. Ruling Uri Party wants to reinforce the ceiling on equity investment by large business groups, while opposition GNP tries to scrap the restriction. At present, 18 business groups with total assets exceeding KW5 tril may not buy stakes in affiliates or third-party companies in excess of 25% of their combined net assets. Government designated the number of companies belonging to chaebols, that are subject to mutual investment and loan guarantee restrictions, stood at 908 in Oct.
Park Yong-sung, a leading Korean businessman, is expected to be formally elected new chairman of the International Chamber of Commerce in Paris next month.

An all-out war on law suit started among the big global players of electronic market. Samsung Electronics (SEC), Hewlett Packard and Matsushita Electric were among 5 companies sued by St. Clair Consultant, a US patent-licensing firm, for allegedly infringing 4 patents for digital-camera technology. 2 US technology heavy weights, IBM and Oracle, are in a dispute in Korea about IBM’s recent newspaper advertising blitz that Oracle calls disparaging. In another patent dispute between Japanese and Korean high-tech companies, Matsushita raised legal proceeding on Plasma Display Panel (PDP) against LG Electronics (LGE), and Toshiba against Hynix on Flash Memory. Japan is on alert when they recently found Koreans took 40% share in LCD production and PDP 50% in global market, which have been monopolized by Japanese indusry with more than 90% share. LGE counter-filed a lawsuit against Matsushita Korea, for infringing its patents for PDP.
Korea has virtually won the lawsuit in US court for countervailing duty on Hynix chips, which was raised by US authorities.
Government is to spend KW2 tril on 5 IT projects to upgrade the national disaster management system and promote automobile information services known as telematics.

Lee KH, Chairman of Samsung Group, was elected 21st world's most respected business man and SEC 32nd world's most respected company.
SEC expanded its share in global DRAM market to 29.8% from 27.7%, firming its leading position, while Hynix lowered its share to 17.1%, down to third largest DRAM supplier from second. SEC is selling its first walkie-talkie phones to Sprint Corp, the third largest US mobile carrier. SEC has won a $340 mil order to supply telecoms equipment to Versatel Telecom International of the Netherlands.

LGE overtook Japans Matsushita Electric, as the worlds second largest maker of PDP during the third quarter. LG Philips LCD plans to spend KW5.3 tril to build the worlds largest plant for flat panel televisions.
The state-owned Oman Oil signed an agreement with LG International and National Petrochemical of Iran to set up a $300 mil ethylene dichloride plant in Oman..

Sovereign Asset Management asked a ditrict court to overturn SK Corp's refusal to honor its request for an extraordinary shareholders meeting. The request came 2 days after SK Corp's board unanimously rejected Sovereign's demand for the meeting aimed at unseating the company’s chairman, Chey Tae-won. SK Corp concluded a deal to get the exploring right in Campos offshore field, expecting the deposite of 360 mil bbl.

Korea's overseas construction orders surged in the first 10 months to $4.99 bil, up 64% on year, in contrast with a sickly domestic sector. Korea also received the orders for the construction of plants worth $7.4 bil, riding the global shortage of electricity and tendency to build eco-friendly industrial plants.
Hyundai Construction won the order worth $125.5 mil from Libya for the expansion of composite power generation plant. Doosan Heavy received order from Kuwait to upgrade desalination plant worth KW68.75 bil.
Government is to push ahead its ambitious New Deal construction plan and tax reforms to bolster the economy, depending on the National Pension Fund and both private and public equity investment funds to supplement the national budget.

A KEPCO's units won government approval to import LNG starting in 2008, encouraging competition among end users and KOGAS. KOGAS agreed to buy 131 cargoes of the fuel totaling 7.86 mil tons from Qatar and Malaysia by April 2008. Korea began commercial production of natural gas, at its first offshore gas field, off 58 kilometers from Ulsan in the East Sea. It is estimated to hold about 5 mil tons of gas, worth around KW1.2 bil, accounting for 2.2% of annual demand in Korea. KOGAS will starts additional drilling to explore the gas in the vicinity of first field from Dec.
POSCO has struck a 10 year supply deal with CVRD, a Brazilian mining group, ensuring an annual supply of 100 mil tons of iron ore at a cost of $2.1 bil until March 2015. POSCO was estimated to take great earning with strengthened KWon, ie KW50 bil for every KW10 down against USD.

MONETARY AND ECONOMIC INDICES

KOSPI started the month at 835, kept going up to 885, then plunged to 849 at the news that KWon fell below 1050 against USD and ended the month on recovery to 878.
The exchange rate of KWon strengthened relentlessly against USD through the month. It began the month at 1148 against USDollar, then broke 7 year's low to below 1100, kept slipping down to 1045 and ended the month at 1047. It has gained more than 14% to the dollar this year, prompting concern that it would hurt the competitiveness of exports, the only pillar of economic growth. JP Morgan predicted the rate further down upto 1040 at the end this year, 1000 in first quarter and 980 in second quarter next year. Foreign exchange reserve hit the new high to $192.6 bil at the end of Nov, $14.01 bil up from Oct. It has easily broken $190 bil barrier for the first time in history and likely to break $200 bil soon.
The Bank of Korea unexpectedly cut its benchmark interest rate to a record low, shaving 0.25% off the BOK's key overnight call rate, sending it to a record low of 3.25%, while US FRB raised the rate from 1.75 to 2.0% at the same time. It was the second cut this year as it lowered the rate 0.25% from 3.75% in Aug. Blumberg and WSJ criticized the decision as a failure just confusing the market.
Yield on 3 years corporate bond lowered through the month from 3.93 to 3.76%, following BOK's decision to lower the call rate. Consumer Price Index in Nov rose 3.3% on year, down 0.6% from last month, thanks to stabilized oil prices. Koreas unemployment rate was unchanged at 3.5% in Oct, compared with 3.6% in Aug, which matched the highest in 3 years.

SHIPBUILDING AND SHIPPING

Korea's shipbuilding industry is facing a mixed phase of the market this year. It has won unprecedented volume of orders, while their expected profitability eroded due to triple obstacles, such as the low contract price, soaring cost of steel and escalating KWon. The ships in low contract price are still to be delivered till early part of next year, giving a serious blow to yards, especially who have neglected to hedge against currency risk at the time of signing contract. Steel price is normally considered about 13-14% of shipbuilding cost, but it became higher than 40% with sky rocketing steel price. On top of them, the exchange rate will give them a tremendous burden in the days to come. People predicted the profit will be eroded by 12-18% on 5% strengthening of currency.
Yards revealed their average profit at around 3% in first half, but foresee no profit or turn into loss in second half. HMD and Hanjin performed well, mainly due to their late start of sales activity, but other yards are facing rather poor performance in third quarter.
HMD recorded operating profit of KW32.5 bil up 17.33%, net profit of KW38.3 bil up 143.95%, on the sale of KW353.3 bil up 23.36% on year, and Hanjin revealed KW10.4 bil up 18.2%, KW3.6 bil up 51% on KW477.7 bil up 47.1%. HHI got -KW90.4 bil, -KW33.1 bil on the sale of KW2.263 tril, DSME KW27 bil down 75.5%, KW41.0 bil down 65.1% on KW1.14 tril up 7.9%, SHI -KW90.4 bil, KW8.5 bil on KW1.144 tril, and STX -KW15.9 bil, -KW1.8 bil on KW198.5 bil.
While Owners are enjoying the benefit of the hottest market in decades, Korean shipbuilders consider raising the NB prices to compensate for the falling value of USD. A report said, at last, a Polish yard made a contract with German owner on the price with steel price escalation clause. Next stage may be another escalation with exchange rate and the main engine for owner's supply.

HHI won the orders from NYK for 8 x 4900 TEU, OSG 2+2 x 216K LNG and Korean Navy 1 x 7000 ton class destroyer equipped with US Aegis system on KDX-III design. More than 30 executives of HHI will leave the company as of end this year reducing the number of directors from 160 to 130 level. YM Yune is retiring and TB Lee will move to Samho. The promotion of the lower staffs will be followed.
HMD received orders from CIDO for 4 x 47K chemical carrier. Its share price surpassed HHI's on the back of good performance in third quarter. Hyundai Corp, ex trade arm of Hyundai Group, acquired 51% stake in Lingshan yard in China for $7.4 mil, aiming to build 10-20K class ships through the world niche market.

DSME signed the contract with K Line for 2 x 38K LPG and QGII 4+4 x 209K LNG.
SHI contracted with AP Moeller for 2 x 150K LNG, OSG 2+2 x 216K LNG, Novoship 4 x 115K tanker, Arcadia 4+2 x 115K tanker, MSC 4 x 9200 TEU and Modec 2 x TLP. It has won the the biggest orders in its history worth $2.2 bil in Nov.
STX got the orders from Barbaro for 2 x LR 1 tanker. STX Busan yard had Clipper Group for 12 x 10.6K IMO II. INP received order from Evaland for 4 x 13K IMO II.

World Scale for VLCC broke 300 barrier, first time since 73, when recorded 400.
Golar LNG has expanded its investment to leading Korean shipping firms, in addition to its existing investment in Korea Line. It confirmed its procurement of 6% stake in HMM, and Gaveran Trading, presumably its arm, acquired additional 1.65% stake, becoming 4th largest share holder. It also purchased a 5.12% stake in Hanjin.
STX Group completed a deal to buy a 67% stake in Pan Ocean Shipping for KW415.2 bil, renaming the company to STX PanOcean. STX Group Chairman Kang Duk-soo became the chairman and CEO of the company, which operates and charters wide range of vessels of around 257 units. STX started an action to find way to list the company abroad next year, to secure the money to replace about 57 ships of their own, which are 15-20 years old.
The performance of HMM in third quarter has been remarkably improved, due to better earning in container and expansion of sales volume in tankers and bulkers. It recorded operating profit of KW184.7 bil up 57.6%, on the sale of KW1.313 tril up 27.5% on year. HMM expands tanker fleet by purchasing a 305K VLCC for the delivery of Jan 2005 and 2 x 49.7K PC in April/July 2005 for a total cost of KW168 bil. Its total fleet will be 18 tankers, becoming global player in tanker operation.
Hanjin achieved the best quarterly performance in third quarter this year. It recorded operating profit of KW254.4 bil up 27.7%, net profit of KW172.3 bil up 0.1%, on the sale of KW1.61 tril up 10% on year, lowering debt ratio to 307% from 450% at end of last year.
Seven Mountain merged Woobang Construction for KW336 bil. It recorded the sale KW232.4 bil with operating profit KW17.2 bil. Seyang Shipping achieved high profit during first 3 quarters, recoding net profit KW27.74 bil, on the revnue of KW167 bil.
POSCO purchased 2.17% stake in Korea Line, who expects POSCO to play a white knight role against possible hostile merge attempt.
Busan District Court declared HeungA Shipping has been out of liquidation procedure. The company recorded net profit KW9.9 bil on KW137.2 bil sale in third quarter.