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Korea Report - February 2005

Author : Hwang & Co Date : 05-03-14 10:15 Hit : 37691

Topics.

-Kyoto Protocol on environment became effective.
-NK disturbed the world confirming its production and possession of unclear weapons.
-Korea maintained 6 month consecutive $20 bil level of export.
-Banks posted unprecedented profit in 2004.
-Government encouraged foreign financial institutions to set up holding companies in Korea.
-KOSPI broke 1000 barrier.
-Kwon once dropped below 1000 against USD.
-Forex reserve jumped over $200 bil to $202.1 bil.
-Shipyard continued struggling with the rising price of steel plates.
-Korean shipowners substantially expands their fleet on their improved balance sheet.
-Tonnage tax system to be applied for Korean shippers.
-MR tanker’s NB price reached $41 mil.

GOVERNMENT AND POLICY

After months of discussion over how to prepare for the Kyoto Protocol, an environmental agreement between more than 150 countries to help reduce greenhouse gas emissions that are suspected to be the cause of global warming, Korean government and companies are gearing up to tackle the issue in a more systematic manner. Korea is not included in the nations who are compulsorily to comply with the agreement in the first stage effective from Feb 16, but expected to come into the group in the second stage starting from 2012.
HMC Group has set up its first hydrogen fueling station at its technical center in Chino, California, in a partnership with UTC Fuel Cells and CheveronTexaco, aiming to produce 15 kilograms of hydrogen per day from natural gas, and charge 30 cars a day.

Government finalized the plan to construct new administrative city in Chungchung Province, accommodating ministries, including Finance, Education, Construction and Maritime. Blue House, Parliament, Supreme Court and Foreign ministry will remain in Seoul.
The Korean government decided to end its decades-long program to purchase rice from farmers starting this year’s harvest. The move is necessary to enhance the competitiveness of local rice growers as the country moves to liberalize its market to outside competition.

Chohung Bank is seeking to slash about 8% of its work force to slim down prior to its merging with Shinhan Bank in Sept. The bank saw 434 employees agreed on voluntary retirement for 20 months salary with special retirement bonus.
In a snowballing corruption scandal, prosecutors arrested 10 Kia Motors’ union leaders, 4 brokers and 2 former company’s executives on suspicion of taking bribes from job applicants and peddling influence to help them get hired.

The government expressed deep regret after a Japanese local government put forward legislation to designate a Takeshima Day, seen as an attempt to lay claim to Korea’s easternmost islets of Dokdo. With domestic anger flaring over Japan’s fresh claims, the Foreign Ministry summoned the Japanese diplomat in Seoul in a move which under-scored the governments heightened concern. A Japanese court rejected a claim for compensation by a group of Korean women who were allegedly forced to work during WW II at a Japanese aircraft factory run by Mitsubishi Heavy Industries.

UN reported that Korea would be the most aged society by 2050,raising medium age of population to 53.9, the world highest, trailed by Japan’s 52.9, due to rock-bottom birth rate,
The sales both domestic and foreign cigarettes plunged $58% in Jan from KW6.59 bil in Jan 2004, in the aftermath of tax increases at the end Dec.

NORTH KOREA AND NATIONAL DEFENSE

NK exercised another brinkmanship, by abruptly declaring not to participate indefinitely 6 parties talks to end NK’s nuclear weapons program, and confirming its production and possession of nuclear weapons for its own protection against increasing US pressure to choke itself, citing the words of “the end of tyranny” and “the outpost of tyranny” in the speeches of US new government’s inauguration.

US Secretary of State reaffirmed US desire to start suspended 6 party talks, saying that NK should return to disarmament talks and avoid further international isolation. US ambassador to Seoul who is newly-named US chief negotiator for 6 party talks, cautioned NK that holding nuclear weapons is a dead end and called for a coordinated approach by concerned parties to get Pyongyang back to the negotiating table.
Korean government made it clear not to tolerate NK’s nuclear weapons, but stressed still to push for dialogue and negotiations with NK. Government is to stop promoting large scale economic cooperation with NK until it resolves tensions over the nuclear weapons.

Despite renewed pressure from USA, Japan, China and SKorea, NK showed no signs of backing away from its decision to indefinitely boycott the talks. NK’s Kim Jong-il told a top-level Chinese envoy, who visited NK to persuade him to come back to the talks, that his country will return to 6 party talks only if conditions are right and USA shows sincerity.

ECONOMY AND POLICY

Samsung Economic Research Institute predicted that Korean economy will likely grow only 3.7% on year, failing to attain expected 4% growth this year. The economy seems to be chained to triple devils like the exchange rate, the geopolitical risk with NK’s nuclear development and the ever-rising oil prices.

Korea’s export maintained 6 month consecutive $20 bil level in Feb, but failed to keep double digit growth rate. It posted $20.52 bil, despite shortened working days, but with only 7.2% growth. Korea’s exports of digital products grew 13.2% on year to $8.12 bil in Jan. Korea’s current-account surplus hit $3.87 bil in Jan, on the back of robust exports, expanding $1.87 bil from Dec. Korea’s industrial output rose 14.2% on year in Jan, the biggest increase in 11 months.

Woori Bank posted the unprecedented net profit of KW1.997 tril last year, up 49.9% on year, which is the largest gain in single bank in the history in Korea. Hana Bank achieved its net profit of KW1.343 tril last year, the largest in its history, taking good synergy effect of merge.
The Korea Exchange Bank has selected Citigroup and HSBC as lead managers for a US dollar-denominated lower Tier 2 bond. The deal is expected to be for around $250 mil and carry 10 year tenure with a call option after 5 years.

China posted GDP growth of 9.5% on year to $1,649 tril in 2004 with consumer’s price index up 3,9% on year. China expects to be world No 3 car manufacturer, producing 6 mil units, 20% up on year, pushing Germany of 5.5 mil to fourth. China has replaced USA as the world’s top consumer, in consumption of 4 of 5 basic food, energy and industrial commodities.
US FRB raised its benchmark overnight call rate by 0.25%, 6th increase since June 2004, pushing the rate from 1% to 2.5%. US trade deficit soared to $617.7 bil last year, hitting all time high, compared $496.5 bil in 2003. The US deficit with China also set a record of $162 bil, up 30.5% on year and the largest imbalance ever recorded with a single country.

Government is closely monitoring a jump in the value of Kwon against JYen, as KWon traded at its highest level in 5 years. At the end of Feb, JYen/Kwon rate reached 9.5848, 5% gain this year. Korean exporters, who compete with Japanese firms in global market, demanded government keep at least KWon 10 per JYen to help them remain competitive against Japanese rival.
Government is to propose an amended bill on financial holding firms to the Parliament to allow foreign financial institutions to set up holding companies in Korea such as commercial banks, securities firms and insurance companies under their roof. Government plans to use a significant portion of its foreign currency reserves to help develop the local asset management industry, using forex reserves as seed money for the KIC, who will continue to the development of the asset management industry in Korea.
Government has agreed to the terms of sale for state-owned Korea Investment & Securities to Dongwon Financial Holding.

Crude oil prices kept soaring up due to the cold wave in USA and UK, ever increasing consumption in China, the threat to reduce the production and weaker US dollar. Dubai crude, about 80% of Korean import, continued its strength posting in 24 years high to $42 per barrel.
Government will raise surcharges on imported LNG from the present KW9,750 to KW15,480 per metric ton starting March 1, to fund mid and long-term energy policies, including supply of regeneration of energy and development of energy source abroad. It will further increase to KW21,210 per ton in Jan 2007. KOGAS selected MLNG, Sakhalin Energy, and Yemen LNG as preferred bidder, for the import of 5 mil ton per year from 2008.

CHAEBOL

Samsung, Lotte Group and Korea Electric Power Corp will be relieved from investment restrictions until 2007 as the government has softened law that limits conglomerates’ investment in affiliates or other companies, by raising the asset threshold for companies subject to the investment ceiling to KW6 tril from the current KW5 tril. The number of companies, 5% or more shares of which are held by foreigners, have sharply grown to 223 in 2004 from 164 in 2003.
About 14 bidders, including Lotte Group, Doosan Corp, CJ Corp, Hite Brewery, Dongwon Group and Taihan Electric Wire, submitted Letters of Intent to buy Korea’s leading soju maker, Jinro Ltd.

Samsung Electronics (SEC) is expected to pay record amount in taxes this year, estimated at KW2.34 tril. SEC is overtaking US based Motorola as the top cellular phone vendor in Russia. SEC ranked 11th most respected firm in the world, by Asian Wall Street Journal, jumping up from 13th last year.
Samsung Engineering won a $154 mil order from Petroleos Mexicanos, Mexico’s state-owned oil monopoly, to build a refinery unit in Mexico.

LG Electronics (LGE) during the fourth quarter of last year overtook Japan’s NEC Corp as the world’s largest maker of third-generation phones that use Europe’s W-CDMA standard. It sold 1.7 mil W-CDMA phones during the quarter, accounting for 21.5% of global sales, compared with NEC’s 1.3 mil units. LGE is to erect a plant to manufacture household appliances in Russia, starting the construction between May and June this year for completion in the first half of next year. Sovereign Asset Management, who is in the middle of dispute for the management right of SK Corp, invested KW1 tril to purchase 5.46% stake in LG Group and 5.7% in LGE.

Korea maintained its position as the world’s sixth-largest maker of automobiles in 2004, producing 3.47 mil units, following USA, Japan, Germany, China and France.
Hyundai Motor (HMC) secured first position in selling the cars in China in Jan, widening the gap with Shanghai Volkswagen by 3 folds. HMC plans to begin the construction of second Indian plant next to the Chennai factory in April for the completion by 2007 to meet the growing demand for cars in India.
The WTO upheld a complaint by Korea that US tariffs on Hynix Semiconductor computer chips violate global trade rules. Hynix agreed to pay royalty to Mosaid for 6 years to settle the patent dispute.

MONETARY AND ECONOMIC INDICES

Korea’s Composite Stock Price Index started the month at 923, kept rapid upward swing to close at 1011.36, hitting the 5 year high and breaking 1000 point mark with the psychological importance. The bourse performed solidly through the month, riding the heavy buying by foreign and institutional investors, the hopes for an economic recovery and the improvement in US market, despite NK’s claim of nuclear weapons possession and sharply strengthened KWon currency. Morgan Stanley predicted that KOSPI would enter re-rating procedure, continuing upward trend to reach 1120 in 12 months, dissolving Korea discount factors. Total capitalization of Korean bourse broke KW500 tril barrier this year first time in history, marking KW500.6 tril, increasing KW56.8 tril from last year.
KWon started at 1027 against USDollar and nose dived to 1006 at the end attributing the money inflow for increased stock purchases and to buy local firm by foreign investors. KWon kept unstoppable drop after BOK announced that it would diversify its foreign holdings, shaking currency markets worldwide as it took BOK’s words as selling USD. Foreign exchange reserves in Feb, which expanded 28% in 2004, rose $2.46 bil from Jan to break 200 bil barrier and hit a new record of $202.1 bil for the first time.
Korea’s real wage grew at its slowest pace in 3 years last year, increasing only 5.4% on year, while consumer prices rose 3.6%, pushing real wage growth down to 1.8%. The yield for 3 years corporate bond started the month at 4.5% and soared up to 4.90%, then settled at 4.49 in the end. The nation’s unemployment rate rose to nearly 4 year high of 3.6% in Jan.

SHIPBUILDING AND SHIPPING

Korean shipbuilders may see their earnings further worsen this year due to the rising price of steel plates and the strengthening domestic currency. Japanese steel mills indicated to raise the steel price in second quarter by $70-80 to $700 per ton. Korean yards strongly protested against Japanese price management to raise from $340 at end 2003 to $700, while they applied 20-30% rise to Japanese yards. Korean Shipbuilders’ Association elected JY Kim, president of SHI, as the chairman of the organization, following the resignation of HMD’s KS Choi.

HHI achieved the sale of KW9.845 tril in 2004, 11.4% up on year, while posting operational loss of KW98.1 bil and net profit of KW36.7 bil down 67.8%.
HHI contracted with Qatar Gas for 2 x 216K LNG, HMM 4 x 8600 TEU and 5 x 4700 TEU, Hanjin 3 x 6622 TEU, IRISL 4 x 4900 TEU container, Petrodec 2 x 82K VLGC and Dorian 2 x 82K VLGC. HHI received a $280 mil offshore construction order from Petroleum Authority of Thailand. Foreigners’ stake in HHI exceeds 25% for the first time.
HMD recorded the sales of KW1.4313 tril in 2004 up 19% on year, operational profit KW130.2 bil up 92.1% and net profit KW106.2 bil up 220.8%. HMD achieved accumulated delivery of 5 mil DWT, in 9 years after it started new building. HMD got the orders from NVA for 5 x 4300 TEU, Claus Peter Offen 6 x 1800 TEU, Orix 1 x 2824 TEU, P&O Nedlloyd 3 x 3450 TEU and Cido 2 x 2824 TEU box ships.

DSME recorded net profit of KW242 bil in 2004 down 5% on year. Sales rose 10% to KW4.76 tril, but operating profit fell 82% to KW60.8 bil. It signed contract with Qatar Gas for 4 x LNG carrier, Chevron Texaco 1 x FPSO, storage capacity of 343,000 tons of crude. Daewoo Mangalia had order from Hamburg Sud for 6 x 5600 TEU container carriers.
SHI signed the order with Qatar Gas for 2 x 216K LNG.

Hanjin Heavy received orders from Miami Schifffahrtsgesllschaft for 4 x 5100 TEU and CMA CGM 4 x 5100 TEU containerships. It posted sales of KW 1.5934 tril in 2004 up 26.5% on year, operational profit KW50.7 bil down 44.1%.
STX also had heap of orders. It received orders from Interorient for 4 x 62K PC ice class shallow draft, STX PanOcean 2 x 45.8K PC and NYK 2 x 47K PC. Price of a MR tanker at last broke $41 mil. STX launched first land constructed vessel for D‘amico’s 47K PC by skid launching system, which enables the yard to increase its output from 24 to 30 ships a year. STX posted net profit of KW21.2 bil in 2004 down 48.4% on year, on sales of KW814.9 bil up 21.2% and operational loss of -KW93.6 bil.
STX Busan got the order from Clipper for 2 x 10.6K chemical carrier
Samho agreed with Unicorn to build 2 x 12.8K chemical carrier.
Daehan Shipbuilding got the order from Normed Int for 3+3 x 10K MPC.

UNCTAD’s report on global shipping ranked Korea as 8th largest maritime nation with 985 merchant fleet of 25.23 mil DWT. Hanjin ranked 6th in container operation and HMM 12th. The law to replace corporate tax with tonnage tax in shipping industry passed the cabinet, expecting shippers to improve its competitiveness in global operation.
Hanjin Shipping posted in 2004 the sale of KW6.2021 tril up 11.39% on year, operational profit KW819.8 bil up 89.77% and net profit KW645.7 bil up 118.72%, attributing the increased container operation and improvement of freight. It lowered debt ratio to 226.59% from 449.92% in 2003. It has invested KW292.9 bil to order 3 x 6500 TEU container ships.
HMM has placed order of 4 x 8600 TEU and 5 x 4700 TEU container vessels to replace the fleet operating in Europe and Mid East, investing KW940 bil. Golar LNG increased its stake in HMM from 7.42% to 8.9%.
Korea Line recorded the sale of KW1.15 tril in 2004 up 83.2% on year, operational profit KW166.5 bil up 142% and net profit up 540.8%.