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Korea Report - February 2004

Author : Hwang & Co Date : 04-03-22 14:05 Hit : 38337

*Topics.

-Tripartite panel made agreement on the measurement to cope with slumping economy.
-Bird flu spread over the world.
-Parliament passed the bill for FTA with Chile and for the plan to dispatch troops to Iraq.
-Korean researchers cloned a human embryo for therapeutic purpose.
-Second round of 6 way talks on NK's nuclear ambition were held with little progress.
-Industry fights against shortage of raw material.
-Citigroup acquired KorAm Bank.
-Samsung's brand power entered into world top five.
-Korea Line stood as a target of foreign investors.

*GOVERNMENT AND POLICY

Tripartite panel, including labor, business and government, reached a landmark 2 year agreement to create the jobs, stabilize the wage and boost the business environment, sharing the pain from the slumping economy. Companies refrain from unnecessary layoffs, labor stops from demanding excessive wage increase for 2 years and government tries to hold annual inflation rate at 3% or less. Federation of Korea Trade Unions signed the accord, while Korean Federation of Trade Unions, second largest union organization, was absent.

WHO warned the bird flu has been spreading so quickly that no part of Asia would be safe and it is jumping to human, as 30 people in Asia died from it. 10 Asian governments slaughtered more than 50 mil chickens and other fowls. WHO said that the world should keep up its guard for 6 months to 2 years until the outbreaks are brought under control in the poultry population. Bird flu also spread into Pennsylvania, New Jersey and Texas in USA. 3 pet cats have died of bird flu and a white tiger has been infected by the virus at a zoo in Thailand, raising fears that the disease is spreading from chickens to mammals. A scientist involved in WHO's fights against SARS in China said that a new pandemic resulting from bird flu combining with a human flu could thousand time worse than SARS.

Busan Mayor, Ahn Sang-young, 64, was found hanged in a cell at the city's detention house where he was arrested on charge of receiving KW400 mil in bribes from 2 companies. He denied the corruption charges.
A law maker Kang Sam-je convicted of diverting KW94 bil from the Agency for National Security Planning to the 1996 general elections campaign funds, has changed his word in appeal court that former president Kim Young-sam gave him the money, not the agency. Kang was the secretary general of then ruling New Korea Party, founded by Kim, and later changed the name to GNP. He had earlier indicated he would go to his grave before he divulged who else was involved. Former President Kim remained taciturn.
A disgraced former President Chun Doo-hwan's second son is under investigation over allegation that he hid KW13 bil of illicit wealth amassed while his father was in the office during 1980-1988. He insisted that the money was given by his grandfather. The investigation is focused on whether the money came from his father, who was convicted of stashing about KW200 bil in illicit funds, which authorities could not recover.

National Assembly overwhelmingly ratified a Free Trade Agreement with Chile, Korea's first FTA, after months of farmers' protests and 3 failed attempts to get the bill to a vote.
Korean researchers, led by prof Hwang Woo-suk have cloned a human embryo which is therapeutic cloning not cloning to make babies and then taken viable stem cell from it, making an important step toward growing patients' own replacement tissues to treat disease, but refueling an ethical disputes in the worlds of science, politics and religion.
Korean movie director Kim Ki-duk, one of the most controversial film maker, was named the best director at the 54th annual Berlin Film Festival for his film "Samaritan Girl"

*NORTH KOREA AND NATIONAL DEFENSE

The National Assembly overwhelmingly approved government's plan to dispatch about 3,000 additional troops to Iraq in late April, capping a dispute that has gripped the nation for months. A contingent of 1,400 combat troops and 1,600 military engineers and medics will be sent to Kirkuk, with the responsibility for undertaking an independent security- related mission. Despite some antiwar sentiment, the number of soldiers volunteering for the dispatch reached about one to 15 ratio.

After 6 months tug-of-war between USA and NK, second round of 6 party talks on NK's nuclear weapon program was held during 25-28th in Beijing in the presence of 2 Koreas, USA, China, Russia and Japan. USA reaffirmed its stance that NK should dismantle all its nuclear weapons including uranium enrichment scheme, in the complete, verifiable and irreversible manner, but NK wanted to maintain its nuclear activities for peaceful purposes though it would abandon its nuclear weapons development. Others promised to offer energy to NK, if NK freezes its nuclear activities. The participants failed to produce a joint communique, but closed the session only with chairman's statement, which confirms the difference in stance to the issue among the participants, the hope to maintain the Korean Peninsula free from nuclear weapons and the third round meeting during second quarter this year. Most observers believe it took meaningful step toward continuing their dialogue, especially compared to the vague first round talks in last Aug in Beijing.

SKorea promised to provide 1 mil tons of rice and 200,000 ton of fertilizer to NK.
The Korean National Tourism Organization has mapped out basic plans for the developing the area near the Demilitarized Zone which divide 2 Koreas, into tourism site where visitors can experience the diverse ecosystem, as a haven for endangered species for a half century. DMZ stretched 248 km length and 4 km width covering 907 sq km.

*ECONOMY AND POLICY

Lee Hun-jai, 60, known as 'Mr. Reform' in Kim DJ government, returned to the cabinet as deputy PM and Finance Minister, 3 and half years after he resigned the same post. He led Financial Supervisory Commission during 1998-99, pushing for drastic corporate and financial restructuring, defying protests from almost all economic fronts. He is expected to steer the economy toward "growth.”

IMF predicted 5.5% in Korea's economic growth this year, with slow upward movement. Business sentiment at Korea's major corporations reached 104.9 for Feb, a 4 month high, up from 99.8 in Jan. Korea's industrial output rose for 8th month in Jan, showing about 4.8% up on year. Corporate investment in facilities and equipment sank 3.1% on year, versus a 1.6% drop in Dec. Korea's consumer confidence rose to 98 points, 4th consecutive increase and 16 month high in Jan from 96 in Dec.
Propelled by increased shipments to China, Korea's exports generated a record high trade volume last year with exports of $193.8 bil and $178.8 bil imports, pushing Korea to regain 12th biggest trader's rank in the world. Korea's current account last year had a surplus of $12.3 bil, and tax revenue rose 10% last year to KW114.7 tril.

Government plans to fight the shortage of raw materials supplies, by increasing 80% supplies of electrolic copper, lead, nickel and aluminum from its stockpiles, with the additional provision of KW230 bil in special economic stabilization fund, and doubled trade insurance period for raw materials and reduced rate in certain cases by 50% for small- and mid-size companies. Korean demand for oil and other fuels is expected to increase at a faster pace this year, by 5.1% to 226.mil tons of oil equivalent.
Korea's import prices in Jan experienced their fastest on-month gains in 32 months, reaching 1.8% on month and 7.4% on year, reflecting higher raw material prices and stronger demand, while export prices gained 1.7% on month and 5.7% on year.

China beat Korea in car production for a second straight year in 2003, becoming world 4th largest auto producing nation, threatening Korean car makers, which accounts for nearly 30% of its export to China last year. China expanded its production to 4.44 mil, up 36.7% on year, while Korea made with 3.18 cars in 2003. Korea's trade deficit with Japan hit a new high of $19.03 bil in 2003, up 29.4% on year, which is larger than nation's total trade surplus of $15.54 bil.
The Group of 7 industrialized countries declared that "excess volatility and disorderly movements in exchange rates are undesirable for economic growth”, calling for Asian governments to refrain from currency intervention. BOK leaned toward accepting the communique, but the ministry downplayed the effect, arguing that KWon has moved between 1,160-1,200 against USD for the past few months for no reason to target KWon.

16 LG Credit Card creditors pledged a KW1.65 tril in new loans and an additional debt- for-equity swap to keep nation's biggest credit-card issuer from collapsing. KEB pulled out of rescue package and KorAm Bank scaled back. They are controlled by Carlyle Group and Lone Star Fund, respectively. Government is facing a flurry of criticism that it remains too soft on foreign owned banks allowing a free ride, while pressing domestic institutions to accept costly bailout. LG Card posted a record KW5.5 bil net loss for 2003, the biggest for any single Korean company.
Korea's 8 major credit card companies had combined deficit of KW8.5 tril last year. However, the fundamentals at the sector are likely to improve as issuers tighten lending criteria and banks increase the provisions against the losses at their card units.
KEB Credit Card is to merge with its mother company KEB, that would involves 55% reduction in KEB Card's workforce. KEB posted a loss of KW213.8 bil last year due to provision for bad assets of KEB Credit. KEB plans to hire Richard Wacker, a top executive of GE, to head its operations.

Citigroup has agreed to acquire 36.6% stake in KorAm Bank, Korea's 7th largest lender, for KW1.15 tril from Carlyle Group, heralding a sweeping change to the domestic banking landscape. The deal is the largest ever overseas investment in Korea and the largest franchises of Citigroup outside USA. Citigroup is reported to acquire all remaining shares and delist the company from the market in order to make the bank with its 237 nation-wide branch offices as the Citigroup Korea. Carlyle Group is expected to gain $560 mil from selling its 36.6% stake, 135% investment profit in 39 month.
Prudential Financial completed its acquisition of an 80% stake in Hyundai Investment & Security and its subsidiary Hyundai Investment Trust for $300 mil.

*CHAEBOL

Samsung's brand power has been raised to top 5 in the world, from 48th in 2001 and 12th in 2002. Minority shareholders led by civil activist groups interrupted the proceeding of Samsung Electronics' general shareholders meeting, demanding the company to explain its plan to invest in new share issues planned by Samsung Card, and to put chairman Lee and 2 other top executives to disciplinary action for their alleged breach of company's rule forbidding the transfer of funds to political parties.

SK Corp decided not to retain 3 directors on its board, including Chairman Son Kil-seung, in a bid to boost corporate governance practice. It nominated 6 candidates for its board elections, including former PM, former presidential aide, former dean of university and former head of KOGAS, for its March shareholders meeting at which Sovereign Asset Management tries to wrest control of the company with its own nominees.
3 top executives of SK Telecom, including SK Group owner Chey Tae-won, resigned from the board, in what may become a defining point in Korean corporate governance, by separating the management from ownership. Chey seems to concentrate on SK Corp.

Financial Supervisory Commission, Korea's financial regulators, have ordered Korea Chemical Co and its founder Chung Sang-young, to sell by May 20 their 20.87% stake in Hyundai Elevator, defacto holding company of Hyundai Group, charging them with the violation of law, which orders to report the acquisition to the financial authorities, when an investor buys 5% or more of publicly traded company. However, KCC stroked back at Hyundai Group and buy an 8% additional stake in Hyundai Elevator even in higher price than market in a renewed attempt to takeover Hyundai Group. Minority shareholders protested in the annual shareholders meeting that KCC's hostile takeover attempt of Hyundai Elevator hurt the company's corporate value and shareholders' interest.

Hyundai Motor put up its best ever business results last year with a record net profits of KW1.75 tril, up 21.2% on year. China Blue Star Group, preferred bidder for a 49% stake in Ssangyong Motor, inspected the company. GE Korea signed a $80 mil deal with Samsung Techwin to produce 27 units of F404-GE-102 engine for Korea's T-50 jet fighters. Korea's IT service industry forecasts to grow at an average 5.1% to KW55.4 tril by 2008. Korean made cellular phone sales leapt 38% in the domestic market to 1.79 mil units in Jan, the biggest monthly increase ever. KOGAS is seeking to buy 120,000 mt of LNG from the spot market in April to meet growing demand from power plants after the closure of 2 nuclear power plants.

*MONETARY AND ECONOMIC INDICES

KOSPI started the month at 854, shed to 839.97 experiencing its biggest decline in 2 month on strengthened KWon, surged to break 870 barrier first time in 21 months by foreign investors purchase and ended at 883.
Exchange rate of KWon has started at 1170 against USDollar, reached its strongest level in 4 months at 1,157.35 by continued aggressive net stock purchase by foreign investors and G7 Finance Ministers' support to weak USD, rebound to 1180 on Korean official's confirmation on its campaign to weaken KWon and ended the month at 1174.
Korea's foreign exchange reserve bulged to a new all time high this month, rising $5.1 bil to 162.59 bil in the first 15 days. Korea remains largest forex holding country after Japan, China and Taiwan.
The consumer prices in Feb rose 0.4% from Jan, 3.3% on year, due to rising raw material and crude oil prices. The producer price index added 1.4% in Jan from Dec to stand at 3.8%, the biggest monthly gain since Feb 98. Yield on 3 years corporate bond has been lowered from 5.75 to 5.54%.

Number of unemployment in Jan gained 0.1% from Dec to make 3.7%, and jobless of youngsters in twenties comes to 8.3%, up 0.3% on month.

*SHIPBUILDING AND SHIPPING

Skyrocketing material cost deteriorated profitability in Korean shipbuilders. Following the surging steel prices, other materials such as stainless steel, copper and nickel has been up more than 50%, due to somewhat overheated Chinese economy.

HHI posted net profit of KW122.1 bil on the sale of KW8.15 tril in 2003, from KW245.4 loss in 2002, after it has erased the burden in connection with former group subsidiary Hynix. HHI made contract with ER Schiffart for 2 x 8200 TEU, CMA CGM 4 x 5100 TEU, Stefan Patjens 2+2 x 5000 TEU, Tsakos Energy Nav 2 x 162.4K tanker ice 1A and Unique Shipping 2 x 82 VLGC. HHI has won a $350 mil order for a FPSO from BP plc, and $421 mil project from ARAMCO to build a 800 megawatt power plant. Hyundai Samho won the order from CMA-CGM to build 2 x 5000 TEU container, NS Lemos 1 x 320K VLCC and Liquimar Tankers 2 x 168K tanker. HMD became a controlling power in world 37-47K tanker market by securing 16 units of them this year. HMD converted its accounting book into black last year with net profit of KW43 bil from the loss of KW78.6 bil in 2002, on the turnover of KW1.19 tril, up 21.55% on year. HMD won orders from Barclay Shipping to build 2 x 47K and 3+3 x 37K chem PC, Latvian Shipping 4 x 37K PC on LOI and ER Schiffart 6 x 2800 TEU container ships,

DSME secured the orders from TMT with 2 x 145.7 cbm LNG, Golar LNG 1+1 x 145.7K LNG, World Wide 1+1 x 300K VLCC, TCC 1 x 305K VLCC, Sovcomflot 2 x Suezmax, SONANGOL 1+2 x 159K tanker, Maersk 2+2 x 4300 PCTC, Louis Dreyfus 1 x 173K bulker. SHI got the orders from Ceres Hellenic for 2 x 115K ice class tanker on LOI and Seaspan 4 x 9500 TEU box ship. Hanjin Heavy Ind posted its net profit at KW24.8 bil last year, up 3.5% on year on the sales of KW1.57 tril, down 5.7%. Hanjin started to apply 5 days workweek system as the first company in Korea. STX racked up orders from Target Marine for 4 x 74.2K coated PC, Pietro Barbaro 2 x 51K PC ice 1A, Hansa Treuhand 2+2 x 3500 TEU, Klaus Oldendorff 2 x 3500 TEU container on LOI. STX finally established a plan to construct a business park on a mil pyung of land in Chinhae by 2006 under the full cooperation of the City, scrapping its earlier plan to move the yard to China. ShinA agreed with ChemiKalien Seetransport to build 1 x 40K PC.
Korea Line saw its share price soaring with explosive volume of trade. Foreign investors take a 47.31% stake in the company, with the recent acquisition of 3.39% by Fearnley Funds and 5.02% by Fidelity Funds, compared to the largest Korean shareholder's 25%. Hanjin Shipping's net profit in 2003 surged to KW330.9 bil from KW18.6 bil last year due to rising freight rate on increased volume of exports to USA and Europe. Korea Special Shipping ordered with MHI for a unit of 78K cbm VLGC on the delivery of mid 2006.