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Korea Report - May 2005

Author : Hwang & Co Date : 05-06-10 15:22 Hit : 39567

Topics.

-President Roh’s popularity dropped.
-Korean researchers created stem cells to match patient’s DNA.
-S Korea started to supply fertilizer to NK after vice-ministerial talks.
-Korean economy may be trapped in Japanese style long-term depression.
-Chung Se-young, ex Hyundai Group Chairman, and Park Sung-yawng, honorary chairman of Kumho Asiana Group, died.
-Government heavily fined KT Corp and investigates Microsoft for unfair business practice.
-Samsung prepares for the appreciation of KWon to 900.
-Hyundai Motor opened its first US car production plant.
-HMC Group is to build an integrated steel mill.
-Oil money in Mid-East made contractors busy and shipbuilders prosperous.
-Forex reserve stopped 2 year long rising streak.
-Korean yards hit the bottom in their performance in first quarter.
-NYK stopped its NB shipbuilding program, due to high price.

GOVERNMENT AND POLICY

President Roh Moo-hyun demanded Japan take concrete action rather than make apologies for atrocities inflicted during its colonization of Korea and aggression in the Asian region before and during WWII. Chinese Foreign Minister refused to apologize to Japan for anti-Japan protests in China last month that damaged Japanese diplomatic compounds and businesses.
Japan’s Prime Minister Koizumi defended his visits to a Tokyo war shrine. The visits anger China and other Asian nations that feel Tokyo has not come to terms with its history of aggression. Chinese Vice Premier Wu Yi cut short a visit to Tokyo, abruptly canceling a meeting with Koizumi, despite Japanese authority complained unpolite.

President Roh, who barely survived the country’s first presidential impeachment bid a year ago, has been hit by further allegations of corruption among key aides, that have resulted in his popularity plunging to 31.6% in a recent survey from near 40% in April when he made his strong rhetoric against Japan.
Prosecutors investigated the oilgate scandal on the aborted oil deal with Russia. The Korean Railway signed a $62 mil contract with Russia’s Alfa-Eko to jointly develop an oil field. But the authorities were only able to retrieve about half of the $6.2 mil deposit after the contract was abandoned late last year, due to the Russian company’s breach of a contract. Prosecutors grilled Rep Lee Kwang-jae, President Roh’s right-hand man, over allegations that he used his political power to push railroad authority for the deal.
A development project on Haengdam Island, a tiny islet located off the west coast and linked to land by Seohae Bridge, has been further tainted by scandal, involved by President Roh’s men, signaling another stormy season for President and the ruling Uri Party. The project is to develop the islet into a resort complex with a tourist hotel, dining facilities and an amusement park, with the budget of KW400 bil.

Researchers led by Seoul National University scientist Hwang Woo-suk confirmed they successfully created stem cells that are tailored to match the DNA of patients with specific medical conditions. Hwang’s team became the world’s first group of scientists to successfully create stem cells from a cloned human embryo in Feb last year.
Government plans to form a taskforce within the state-run foundation to support international collaboration and manage intellectual property rights on stem cell research. The ministry will also invest KW24.5 bil this year in operating laboratories and research facilities for stem cell and spend an additional KW3 bil this year to support scientists.

Korean’s business community turned down further negotiations with organized labor on a proposed bill that calls for increased protection for irregular workers. Three of Hyundai Motors’s labor union leaders were arrested on charges of receiving bribes from job applicants for the company. 31 business men, convicted of bribery, window-dressing and other crimes, will be granted special amnesties on the occasion of Buddha’s birthday on May 15.

NORTH KOREA AND NATIONAL DEFENSE

The Pentagon abruptly suspended US efforts to recover the remains of American soldiers during Korean War in NK, saying NK was creating an environment that could jeopardize the safety of US workers. The recovery missions began in 1996 and has been the only form of US-NK military cooperation. Korean Foreign Minister and his Chinese counterpart shared deep concern over the spate of invective exchanged recently between the USA and the NK.
US military issued layoff notices to more than 100 Koreans employed at its air bases here earlier this month. The move is seen as USA implementing its plan to cut 1,000 Korean civilian jobs at its military installations in protest of Seoul’s decision to slash its financial contribution to the US troop presence.

Seoul consider its annual defense budget to increase by 10% for the next 5 years so that it could be less dependent on USA for national defense against NK. The defense budget for 2005 stands at KW20.8 tril, about a 9% increase on year, comprising 2.9% of last year’s GDP. For the first time since its deployment to Iraq, the 3,500 member SKorean Zaytun contingent was the target of rocket attacks, but no casualities or injuries have been reported.

2 Koreas opened 2 days of vice-ministerial level talks in the northern border town of Gaesong amid hopes they will help stabilize inter-Korean relations after a 10 months hiatus and nudge the North toward resuming 6 party talks on its nuclear weapons program. When NK agreed to hold Ministrial talks in June, SKorean trucks started to drive across the DMZ to deliver 200,000 tons of fertilizer aid to NK desperately needed for Spring seeding.
A NK passenger ferry docked at a Japanese port, the first port entry in 5 months since Tokyo passed a law to ban NK’s ships’ entry and press Pyongyang for information about abducted Japanese nationals.

ECONOMY AND POLICY

Finance Minister warned if Korea fails to reform fundamentally its economic system now, its economy could be trapped in a Japanese-style long term depression, saying that the economy would undershoot the target growth rate of 5% this year and confessing that the government has not been honest in describing the economic reality or that its reading of the economy has been far less accurate than those of private or foreign experts. Korean economy expanded 2.7% in the first quarter on year, the slowest rate in almost 2 year.

Korea Posted a current account deficit of $909.5 mil in April, compared with a surplus of $1.11 bil in March. Exports exceeded $100 bil on May 17th, 2 weeks earlier than last year, expecting smooth accomplishment of annual target of $285 bil in this year. Korea's economic growth turned out heavily depending on export, as its 4.6% growth in 2004 attributed 4.3% to exports. Exports of information and communication technology products reached $6.24 bil in April, up 1.7% on year, relying on steady sales in the mobile-phone and semiconductor segments. Korea’s crude oil import bill in April rose 45% on year to $3.07 bil. Overseas investments by Korean individuals have soared this year as they seek vehicles to park their ample funds, making a total of $246 mil worth of overseas investments through April, up 21.6% on year. The consumer confidence index for the next 6 months stood at 101.3 in April, above the benchmark 100, but slightly down from 102.2 in March.

Propelled by the government's increased budget spending, the national debt in 2004 rose 22.57% from the previous year to KW203.1 tril, which accounted for more than 26% of GDP. Gorvernment plans to increase spending on social infrastruture by about 10% to a total of KW53 tril for the construction of roads, bridges and other social infrastructure next year, in order to help growth in the economy.

Finance Minister confirmed that Korea’s recent moves to strengthen disclosure rules over stock holdings are aimed at boosting transparency and fairness in the local financial market, not discriminating against foreign investors. HSBC supported Korean government’s move on 5% rule, saying that it is difficult to consider the rule as anti-foreigners sentiment, but as a reasonable one practiced in many countries.
The Seoul metropolitan government said it will investigate whether the government-run Singaporean investment agency evaded taxes in the course of acquiring an office building from US-based Lone Star investment fund. Deutsche Bank AG's Korean unit may face penalties for conducting inappropriate trades relating to derivatives contracts, as the Financial Supervisory Service is assessing the sanctions it will impose on the German bank.

Korea renewed currency swaps with Japan and China, as a part of its efforts to pursue stabilization of regional financial markets through supplying short-term liquidity. Korea and Japan agreed on a KWon-JYen swap line worth $3 bil, in addition to an existing $2 bil yen-dollar swap line. Korea and China also agreed on raising the bilateral swap line to $4 bil from the current $2 bil deal.
Korea has been the biggest victim of China's anti-dumping regulations over the past 9 years. China has imposed 26 anti-dumping measures on Korea since 1997, comparing 21 for Japan, 18 USA, 8 Russia and 7 Taiwan. Japan posted the biggest net profit in the trade with China, led by steel and chemical industries. US economy expanded at a 3.5% annual rate in the first quarter, in an upward revision that prompted some analysts to argue that the soft patch is over.

US Treasury Secretary has publicly urged China to make some changes to its currency peg against the USDollar, stressing that it would be essential to warding off protectionist trade legislation in Congress. The Chinese government who tightly manages its currency, effectively pegging it at 8.28 Yuan to the USDoallr, confirmed no timetable has been set for easing the dollar-peg on its yuan currency and it will not do so unless considions are right, saying that China would not bow to outside pressure on reforms of its currency policy.

CHAEBOL

The association representing Korean’s listed companies has demanded civil and criminal immunity for the past accounting violations, in connection with class-action lawsuit coming into effect from this year. In March, policymakers passed an amendment to the related law to grant a 2-year grace period for malpractices committed before the law was enacted on Jan 20, 2004, so companies can correct their mistakes.

Chung Se-Young, honorary chairman of Hyundai Development and the younger brother of the late Hyundai Group founder Chung Ju-yung, died at the age of 78. He had long served as chairman of Hyundai Motor and Hyundai Group.
Park Sung-yawng, honorary chairman of Kumho Asiana Group, died of an undisclosed chronic illness, at the age of 74.

The Fair Trade Commission fined KT Corp., a record KW115.9 bil for price-fixing on Internet and fixed-lines services. FTC said KT swapped market share for the price fixing with the rival companies. KT filed a lawsuit against the case. Government found Microsoft Corp have unfairly used its monopoly position while selling its Windows operating system, being allegedly indulged in unfair business practices by bundling its Media Player and MSN Messenger programs as part of the systems. Microsoft promised to fully comply with a imminent ruling by Korea’s regulator on allegations in antitrust activity.

Samsung Electronics’ (SEC) top management urged the company to be ready for KWon’s further appreciation, warning that it may strengthen to KW900 against USDollar this year. SEC has begun mass-producing 4-Gigabit NAND flash memory using 70-nanometer micro-processing technology for the first time in the world. The global market for NAND flash memory this year is estimated at $8 bil, with 4 Gigabit products accounting for 30% of sales.
SEC has old 10 mil units of mobile phones in Russia within 7 year since it started the sale there, keeping top market share of 23.1%.

LG Electronics (LGE) begin selling next generation mobile phones in USA. The EDGE phones, short for Enhanced Data rates for GSM Evolution, which are capable of sending data 3 times faster than other wireless technologies, making it more suitable for sending and playing bulky multimedia files, such as video on demand.
Hynix Semiconductor has begun mass production of 300 millimeter wafers at its plant at Incheon, reinforcing its presence in the worlds semiconductor market.

Hyundai Motor (HMC) opened its first US production plant in the capital of Alabama. The $1.1 bil factory, the first to be set up in the world’s biggest car market by a Korean automaker, aims to roll out 150,000 Sonata sedans from this year. The state of Alabama has exempted HMC from taxes totaling $252.8 mil and built the road to the plant, rewarding the company for creating some 2,000 jobs. US public perception of Hyundai cars has changed greatly over the past few years, with sales soaring from 90,000 cars in 1998 to almost 420,000 last year, commanding 2.7% of US market share.
HMC Group officially announced its determination to build an integrated steel mill with capacity of 7 mil tons annual production. The Group has tried 3 times to enter the steel industry before in 1977, 94 and 96, but failed because of government’s disapproval and IMF crisis. It will start construction in 2007 to make first product in 2010.

POSCO acquired 50% share of Korea Integrated Energy, the biggest private power plant, from Hanhwa Group for around KW250 bil. POSCO Engineering & Construcion won a project to build two power plants in Iran worth $1.2bil.
Hyundai Construction won the order worth $379 mil from Kuwait to build a ethane recovery plant with the daily capacity of 5,273 tons, for the completion by June 2008. It has also received $696 mil order from UAE for a disalination plant to complete by April. 2008.
Doosan Heavy has been chosen as the preferred negotiator to build a nuclear power plant in Zhejiang Province, the first step on a possible landmark deal in China. SK Construction signed the contract worth $1.22 bil, the biggest single project won by a Korean company, for the collection of crude oil from Kuwait Oil Co. A consortium led by Daewoo International has signed $12 mil contract with Myanmar to computerize its government ministries and interconnect them with high speed Internet network.

GE Finance has nearly completed negotiations for a business tie-up with Hyundai Card, reportedly seeking to eventual buy up 40% stake in the company for KW400 bil to become the No.2 shareholder. Bosch Korea plans to invest KW140 bil in its operations during the next 3 years, including the automotive parts plants factory in Daejeon and the expansion of its research and development center in Yongin. Kuwait bought about 4% of SK Corp, the biggest refinery in Korea, to help the Gulf state secure markets for its crude in Asia. Hankook Tire chose Slovakia for a plant costing more than 500 mil euros to supply its products to carmakers from Europe.

Hite Brewery is to sign a formal contract this month to take over Jinro for the amount of nearly KW3.3 tril. Trigem Computer, Korea’s No.3 personal computer maker, filed for bankruptcy, resulting in the delisting of the company from the local stock market 16 years after its entry. Woori Bank reopened a bid to sell a majority stake of a 85.6% in a auto parts maker, Daewoo Precision. Korea Asset management signed binding MOU with Ajoo Industry to sell 51% stake in Daewoo Capital. Mirae Asset Management was selected as preferred bidder to acquire SK life Insurance, after US Met Life failed to conclude the deal. It is known to bid KW160 bil.

MONETARY AND ECONOMIC INDICES

Korean bourse started the month with KOSPI at 910, fluctuated in the box of 950-920 and climbed to 970 at the end. Goldman Sachs predicted Korean stock market will gain 20% in 12 months, recommending to buy.
Kwon has been stable in the range of 999-1009 against USDollar to end the month at 1007. While KWon kept strength against USD, JYen has weakened to mark JYen/Kwon exchange rate of 920 level, the lowest in 81 months. BOK Governor’s remark to a Financal Time’s interview, that the nation won’t intervene in forex market, once again roiled currency markets, sending officials scrambling to assure the business community that it will intervence to keep KWon from strengthening too much against USDollar. The currency market, reacting to the remark, sent KWon once as high as 999.50.

The foreign exchange reserve stopped 2 year long rising streak in May. It posted $206.1 bil at the end of the month, $620 mil down from the end of April. BOK considers using its rising foreign exchange reserves as loans for domestic banks over the long term, a measure that could ease the capital conditions of local banks.
BOK kept its benchmark interest rate frozen for a sixth consecutive month as it softened its optimistic view of the economy. Korean consumer prices fell in May for the first time in 6 months as the price of agricultural and industrial goods dropped. The consumer price index dropped 0.2% to 117.7 from 117.9 in April. Korea’s unemployment rate rose 0.2% on year to 3.6% in April, hitting a 4 year high and casting doubt over the pace and strength of a nascent economic recovery.

SHIPBUILDING AND SHIPPING

Domestic shipbuilders and steelmakers agreed on the mutual efforts to ensure stable supply and demand of steel products. Steelmakers pledged to strengthen their ability to respond appropriately to increasing demand of premium steel products while their operation is supported by shipbuilders’ cooperation. The 2 industries will increase joint development and usage of new products through expanding ties in research and discuss occasionally on supply and demand situation and other current agenda.
Danaos secured competetive financing from Koexim Bank for $135 mil on the 2 x 9600 TEU container ships contract signed in 2003 for $91 mil each, as a part of 8 ships series. 75% of ship’s price was financed by Koexim.
The big 3 yards hit the bottom of their performance in first quarter posting the operational loss. HHI recorded KW 74.2 bil and SHI KW39.3 bil loss, and even DSME, who made the best performance last year, turned into red with KW 151.6 bil. HMD posted operating profit of KW23.64 bil, 28.16% down on year and 29.9% down from last quarter while Hanjin’s operating profit was KW3.6 bil against KW10.6 bil in 2004.
NYK, who announced in March a new building plan of 278 vessels over next 6 years, has called a halt ordering until prices fall. Yards concern other owners may follow, because of prices as well as no space available until 2008, which is too far to commit.

HHI signed the contract with NYK for 4 x 6500 TEU container vessel, and NITC 4 x 317K VLCC and 4 x 164K Suexmax, 6 of which will be built in Samho. HHI broke the output of 50 mil BHP barrier since it started production of big engine in 1979, first time in the world, even earlier than Japanese who have supplied for 80 years. HMD won the order from Great Eastern for 1 x 37K PC and Cido 2+4 x 47K PC.

DSME received order from NITC for 3 x 318K VLCC, Exmar for 2 x 84K VLGC, Maran Gas 2 x 84K VLGC, CMA-CGM 4 x 8400 TEU and Hamburg Sud 4 x 5560 TEU container ship. SHI secured contract with ChevronTexaco for 2+2 x 155K LNG, a Japanese owner 1 x 155K LNG, Geden 2 x 115K tanker, and OOCL 2 x 4300 TEU box ship.
Hanjin got the order from APM Moersk to build 4 x 4000 TEU, STX from Parakou for 4 x 51K PC and ShinA from Ocean Tanker for 2 x 49.7K PC.

HMM posted strong first quarter result with higher freight rate, increased cargo volume and lower interest rate, despite high fuel cost. Net profit was KW156 bil, 50% up on year, 25% higher than previous quarter. Reported sales was KW1.24 tril, 3.7% up and operating profit KW151 bil 20% up on year. HMM issued a KW120 bil in unsecured bond, on 5 year maturity at a discount of 1.22%, for operating funds.
Korea Line posted the operating profit of KW45.3 bil in first quarter down 25.2% on year and net profit of KW57.4 bil down 24.9%, on the sale of KW2850 down 8.8% on year, mainly due to falling freight. Profits from Korea Line saved Golar LNG, as 56% of Golar’s net profit of $17.7 mil for the first quarter was generated from its stake in Korea Line.
STX Shipyard plans to sell stake in STX Pan Ocean via an initial public offering on the Singapore Stock Exchange this year.