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Korea Report - June 2004

Author : Hwang & Co Date : 04-07-09 16:37 Hit : 39203

Topics.

-The relocation of a new administrative capital faces growing opposition.
-The ruling party devastated by a decisive defeat in by-election.
-Labor union started its summer strife.
-Islamic militant in Iraq killed a Korean hostage.
-6 nations talk to resolve NK’s nuclear stand off made some progress.
-GM Corp confirmed to make GM Daewoo a prime engineering centre in Asia-Pacific operation.
-Korean yards reached almost their annual sales target in May.
-Many companies consider newly entering shipbuilding industry, while major yards try expanding.
-The program to sell Pan Ocean counted down.

GOVERNMENT AND POLITICS

The government’s ambitious project to build a new administrative capital in a central region of the nation has entered extreme arguments throughout the country. President Roh Moo-hyun is determined about the relocation, citing the need to encourage more balanced regional development in the heavily centralized country. The relocation plan was the centerpiece of his campaign manifesto, and played a decisive role in his dramatic victory in the 2002 presidential election. Government has designated 4 sites to build a new administrative capital in Chungcheong Province and a total of 85 public institutions, including the National Assembly and the Constitutional Court, will be moved to the new administrative capital due to be set up between 2012 to 2014.
The opponents, including opposition GNP and DLP, Seoul City and other metropolitan councils, are demanding a national referendum on the issue as President Roh had promised earlier, on the back of growing public opposition to the relocation of the country’s capital, casting doubt over whether the highly controversial plan could go ahead as scheduled. The government announced the overall cost will be about KW 5.6 tril, but accurate estimates remain in limbo since the final site has yet to be chosen and the blue-prints still have to be drawn. The original estimate made by Roh when he proposed, was KW 4 tril. Popular vote show 41% for and 50% against the project.

The ruling Uri Party’s devastating defeat in June 5 by-elections and local elections, before it awoke from its sweet dream of overwhelming victory in April 15 general election, is complicating President Roh’s management affairs of the nation and stirring disputes about whether the party should conduct a major reshuffle to renovate itself.
Rep Lee Hai-chan of the ruling Uri Party, 52 years old former Education Minister and 5 times law maker, was designated as prime minister by President Roh and approved by the National Assembly, heralding the political and social reforms. Former Uri Party Chairman Chung Dong-young was appointed Unification Minister, former floor leader Kim Geun-tae Health and Welfare Minister, and Rep Chung Dong-chae Culture Minister in a reshuffle of Cabinet.

Government selected 6 areas, such as Changwon, Gumi, Ulsan, Banwol, Sihwa, Gwangju and Wonju, to develop into major industrial belts, with annual support of KW100 bil beginning next year.
Government is to open 4 new free-trade zones to facilitate foreign investment and ease customs processing, technically classifying the area as foreign countries in terms of customs clearance and the movement of goods. The areas designated are the currently customs-free zones of Busan, Gwangyang and Incheon ports and Incheon International Airport. The country already has four free-trade zones in Masan, Gunsan, Iksan and Daebul.

A total of 121 public and private hospitals unions nationwide and tens of thousands of taxi drivers and metal workers went on strike, calling for better working conditions and payment of delayed wages. It amplified public concern about the effect on everyday life with a lingering hospital workers strike and other looming industrial labor disputes.
The nation shifts to a five-day workweek from July 1, but most of the 1.8 mil workers are still waiting for details. Only 51.5% of public or state-run companies have completed the deal to arrange holidays, overtime pay and menstrual leave in line with the new 40-hour scheme.

Government raised minimum monthly salary to KW640,000 starting Sept, from current KW567,260. Koreas per capita tax burden reached a record high of about KW3 mil last year, almost twice the KW1.603 mil recorded in 1995, attributing largely to a jump in income taxes, special consumption tax and inheritance and gift taxes.
Korean government will seek to lower the legal adult age from 20 years to 19, reflecting rapid social changes.
Jo Bonfrere, 58 year old Dutchman, was named as the new head coach of the Koreas national soccer team until the end of the 2006 World Cup in Germany.
Athletes from South and North Korea agreed to march together during the opening ceremony of the Athenes Olympic Games in August.

NORTH KOREA AND NATIONAL DEFENSE

Government announced a plan for deploying 3,655 Korean soldiers to 2 different areas in Iraq, Rashkin and Swarashi. Korea has originally set the dispatch in April, but delayed due to the worsening security situation in Iraq, mounting anti-war sentiment at home and complicated logistical problems. Some law makers of ruling and opposition parties submitted an appeal to Parliament to withdraw the plan to dispatch the troops to Iraq.

Islamic militants in Iraq beheaded Kim Sun-il, a 33 year old employee of a Korea\'s general trading company June 22. They kidnapped him May 30, threatened to kill the hostage, unless Korea cancels its plan to send troops to Iraq, and aired a videotape of the hostage begging for his life in front of Iraqi gunmen. Shock, grief and rage engulfed the nation as Koreans learned the news on the death of Korean hostage. Government vowed to press ahead with its plan to send more troops to Iraq despite the murder of Kim Sun-il, saying it would not cave in to terrorist threats. About 2,000 government officials, politicians and citizens attended Kims Christian funeral held at Busan June 30. President George W. Bush sent a letter to President Roh to express his condolences about the death of a Korean hostage in Iraq and appreciation for Koreas commitment to fighting against terrorism.
The nation was thrown into confusion over the decision to send troops to Iraq, which apparently provoked the militants to murder the hostage. While the general public sentiment remained against deployment, brutal killing of Kim Sun-il prompted an increasing amount of support for the governments determination to send more troops, despite the militants threats.

North Korean leader Kim Jong-il expressed his commitment to enhancing inter-Korean relations, while President Roh promised comprehensive economic assistance to the North once their nuclear standoff is settled.
After a marathon 21 hours of talks, South and North Koreas’ military officials achieved a major breakthrough toward securing peace on the Peninsula, taking the measures to prevent accidental clashes in the West Sea, by openning a common radio frequency to coordinate communications and avoid conflicts at sea. They also agreed to stop propaganda activities along the Military Demarcation Line and remove propaganda machines and signboards.

USA publicly announced its plan to withdraw one third of its 37000 soldiers in Korea by the end of 2005, marking the fifth major reduction of its troop level in Korea since the allies signed a defense treaty in 1953, while SKorea asked USA to delay the abrupt changes in its military presence on the Peninsula, in order to have time for a more self reliant defense.
Korea’s Defense Ministry requested KW 21.5 tril for next years budget, up 13.4% from this year, to strengthen its war capabilities against NK. The proposed budget accounts for 2.9% of the GDP, while spending this year is KW 18.9 bil, comprising 2.8% of last years GDP.

The much-anticipated third round of 6 nations talks, with 2 Koreas, USA, China, Japan and Russia, were held to resolve NK’s nuclear standoff June 23-25 in Beijing.
President Bush has authorized a team of American negotiators to offer NK a new but highly conditional set of incentives to give up its nuclear weapons programs, promising to provide the aid immediately after a commitment by NK to dismantle its nuclear weapons programs, and suggesting a provisional guarantee not to invade the country or seek to topple Kim’s government. NK will have three months to reply.
America’s softened stance toward Pyongyang have taken delegates from its allied nations by surprise, however, the talks failed to produce any break through. NK\'s Foreign Minister promised to be patient and flexible in 6 party talks but complained that a lack of trust was impeding progress. NK demanded 2.0 mil KW of electricity as a compensation of their freezing nuclear development.

Hyundai Asan is to start one-day overland tour service from July 3 to Mt Geumgang. 2 Koreas agreed to open 7 harbors each other for the more efficient marine transportation.
The European Union granted 9.1 mil euros in urgent medical aid for NK to buy medical equipment and medicines, and upgrade hospitals that have fallen into serious disrepair.

ECONOMY AND ECONOMIC POLICY

OECD foresaw 5.6% economic growth in Korea this year, but warned there are significant risks on uncertainty about private consumption, as well as slowdown in export demand, particularly in China, which has been the major driving factor for the growth. BOK lowered its forecast on Korea\'s economic growth in 2004 to 5.2%, due to sluggish domestic demand and high oil prices. Citigroup has also slashed Korea’s economic growth outlook for 2004 to 5% from its earlier 6.3%. Moodys upgraded the outlook on SKorea\'s credit ratings to stable, citing continued efforts to reduce tensions with NK.

The BOK’s consumer confidence index sank to its lowest point in 3 and half years during the second quarter, to 80 from 84 in the first quarter, confirming the further delay of the nations economic recovery. BOK reported that Korea’s overall savings rate soared to 5 year high in the first quarter, surging to 31.5% up 3.5% on an annual basis, as people were un-willing to open their wallets amid a long-running economic slump.
Government is to adjust various taxes, including transportation tax, special excise tax and sales charges as of July 1, as part of its efforts reduce the price gaps among gasoline, diesel and LPG. The excise tax imposed on LPG and butane will be raised from KW 297 per kilogram to KW 382.

IT related exports reached a monthly high of $6.53 bil in May, a 60.7% jump on year, driven by rising semiconductor prices and mobile-phone sales.
Korea’s export of films has continued to grow this year, signing $37 mil worth of contracts for the distribution of local movies in foreign markets by May, a record that surpasses the $30.98 mil worth inked for all of last year.

Government is to inject about KW2.8 tril into the countrys two largest trust companies, Korea Investment & Securities Co and Daehan Investment & Securities Co, before open sales.
Korean credit card companies’ assets fell about 15% in the first 3 months of this year as they made efforts to cut bad assets. Total assets of 9 major card issuers amounted to KW64.3 tril, down KW 11.2 tril from 3 months earlier. The number of Korean debt delinquents fell to 3.7 mil in May, down 2.3% on month.

China’s consumer price index rose 4.4% at its fastest pace in more than 7 years in May. Economists predicted that the central bank likely waits for the result of economic activities before raising interest rates, partly out of fear of harming debt-ridden state enterprises.
According to JP Morgan, China may have seen $5 bil in capital leave the country during May as the government tried to slow the economy and global expectation for US interest rate rises.

The union of KorAm Bank started strike, demanding a guarantee of full employment, pay rise of up to 10.7% and special bonuses. It also demanded that KorAm should be managed independently from Citigroup who owns 97.5% stake in KorAm Bank. Repeated failures of negotiations to resolve the difference of stance between management and labor raised fears to possibly prompt a run on deposits and damage overall financial networks.

CHAEBOL

Korea’s large business conglomerates revealed the plans to spend nearly KW150 tril to promote job growth and corporate investment to help propel the economy.
The Fair Trade Commission is to force chaebols to disclose the shareholdings of family members of major business from next month, expecting to ratchet up the pressure on family-controlled chaebol to enhance corporate governance and transparency.

Samsung Electronics (SEC) recaptured top place in the world market share of CDMA phones, marking the sale of 7.4 mil units against LG\'s 6.4 mil. SEC moved its core liquid-crystal-display operations to Tangjeong in South Chungcheong Province, heralding an era of 7th generation fabs. SEC expects to grab 20% of the Southeast Asian mobile phone market this year. Lee Kun-hee, Chairman of Samsung Group, has accepted a government proposal to reduce his voting rights on his shareholdings in affiliate financial units.
Samsung Card and GM Acceptance Corp, the financing unit of the world’s biggest automaker, are to establish a joint venture to grab a bigger share of the country’s KW10 tril auto financing market. GM side will own an 80.5% stake in venture, named GMAC Capital, while Samsung Card will hold the remaining 19.5%.

Hyundai Motor (HMC) has been granted a final approval of its settlement resolving a class- action lawsuit that claimed the company overstated the horsepower of 1.3 mil vehicles and inflated the value of its models. Under terms of the agreement, approved June 16, owners of each vehicle will receive up to $225 in cash or up to $325 in credit with Hyundai dealers.
HMC and its Chinese partner agreed to start producing Hyundai\'s Tucson SUV at their 50-50 joint venture plant in Beijing. HMC Group’s INI Consortium signed MOU to acquire Hanbo Steel for KW910 bil, paying already a 5% of performance bond.
GMC confirmed that its Korean affiliate GM Daewoo would be a prime engineering centre of its Asian-Pacific operation. It considers spending more than KW100 bil to build its first proving ground and a R&D facility by 2006 and establish a new research center by 2008.

Korean Air (KAL) has ordered two cargo planes from Boeing for $400 mil, whose delivery sets in the second half of 2005. KAL and Boeing signed an agreement on a joint venture to remake passenger planes into cargo aircraft. Under the agreement, KAL will take part in converting 20 units of 747-400 passenger planes, including 10 from its own fleet, using equipment and technology provided by the US aircraft manufacturer.
Korea’s aviation industry is one of the areas hardest hit by the recent surge in fuel costs, but the good news for the carriers is the strong growth momentum in both passenger and cargo traffic which could mitigate the impact of the rise in the jet fuel prices.

SKT has agreed with Pele-Phone Communications, Israel\'s third largest wireless company, to offer an international roaming service.
The creditor banks of Hynix Semiconductor approved the sale of its nonmemory operations to Citigroup Venture Capital for KW 954.3 bil.
KEPCO signed a memorandum with one of China’s biggest power companies to jointly pursue a power generation project that involves Korea, China and third countries.
LG Electronics has expanded its supply agreement with US-based Cingular Wireless, to provide mobile handsets based on GPRS technology. LG Philips LCD, 50-50 joint venture between LGE and Royal Philips Electronics, plans to raise $1.2 bil from an initial public offering next month. Templeton Asset Management increased its sake in LG Petrochemical from 3.6% to 5.08%.
Rotem, a Korean rail road and subway car maker, reported to secure an order for 32 subway cars worth $58 mil from Mass Transit Railway Corp of Hong Kong. It has also signed a contract with an Indian firm on the transfer of technology for $4 mil. It has delivered 260 trains to Greece for the usage in Olympic.

MONETARY AND ECONOMIC INDICES

KOSPI fluctuated again on roller coaster, following the news on oil prices, possible rise of Chinese interest rate and the worsening situation in Iraq. It started month at 800, went up to 809, plunged to 738 and stabilized at 785 at the end of the month. Senior government officials and lawmakers will be banned from trading stocks worth more than KW50 mil starting January, and entrusting them with finance firms if they want to keep their stocks. It is to prevent moral hazard of officials with access to high-quality information.
The exchange rate of KWon has been stable in the range of 1154-1164 against USDollar throughout the month. Korea’s foreign exchange reserves stood at $166.08 bil as of June 15, down $470 mil from a month earlier. Koreas overseas debt rose $8.1 bil in the first quarter, marking the gross foreign debt climbed to $169 bil. The current account reached a surplus of $3.8 bil, more than trebling from April $1.1 bil
Korea\'s foreign exchange reserves edged up to $167.03 bil at the end of June from $166.54 bil at the end of May.

The national unemployment rate fell in May to 3.3% from 3.4% in May, largely due to increased hiring in the agriculture, forestry and fishery industries.
Wholesale and retail sales fell 2.2% on year after 0.2% growth in April. The yield on 3 years corporate bond has been stabilized in the range of 4.93-4.84% through the month.

SHIPBUILDING AND SHIPPING

Korean yards have reached almost their annual sales target by the end of May, marking $14.289 bil, 93.5% of their annual goal. They actually stop the sales activity on general cargo ship, but concentrating on high value added vessel. 8 LNG carriers for ExxonMobil-QGPC’s first stage project have all gone to Korean yards. Foreign investors kept buying Korean shipbuilders’ stakes, expecting well balanced operating performance.
The price of VLCC has reached the highest level in 10 years to above $90 mil, while POSCO raised its steel price third time this year to KW550,000 from KW505,000 per ton. The bulker prices have shown downward trend in recent months, however there is still good chance for them to go up anytime, unless the excessive demand in China is fundamentally settled.
The major Korean yards are still expanding their capacity especially to build LNG carriers, in an anticipation of overflowing orders from Qatar, Sakhalin and Nigeria. On the back of the unprecedented boom in shipbuilding industry, a number of companies feel it proper timing to jump into the shipbuilding industry, by constructing the yards especially in Mokpo and Tongyoung area to build the ship in the range of 10,000 to Panamax size.

HHI won the orders from Tsakos Energy Nav for 1 X 150K LNG, Sovcomflot 3 X 35K LPG, Mersk Sealand 2 X 4300 TEU and Peter Dohle 2 X 2500 TEU. HHI sold its 3.2 mil shares in Hyundai Motor reaping substantial profit of about KW80 bil in the transaction. HMD signed contract with Vroon for 1 x 46K chemical carrier.
DSME announced that it secured orders from Bergesen for 3+3 x 148.3K LNG, Knutsen OAS for 1 x LNG Maran Gas 1 x 145.7K LNG, Gulf Marine Management 3 x 300K VLCC, Korea Line 1 x 170K bulker, Sonangol 1 x Suezmax and Vela International Marine 2 x 50K PC. KDB, the biggest creditor of DSME, shelved plans to find a single buyer for its controlling $736 mil stake in DSME, but instead to offer the shares in the form of global depository receipts or sell its stake in smaller pieces to private equity funds.
SHI still found a space to build 2 x 113K tanker for Geden.
STX got the order from Motia di Navigazione for 2 x 37K chem PC. STX has revitalized its Busan shipyard for the new building of 10,000 DWT class ships, appointing Suk Chan-kyun as the head operation. STX Corp won its fight for management control amid growing speculation about a hostile takeover, securing more than 55% of friendly stake.
ShinA got another declaration of option for 1 x 29K PC from Chemikalien Seetransport.

Hutchison Whampoa Ltd, billionaire Li Ka-shing’s retail in Hong Kong, paid HK$606 mil for a 12% stake in HMM. It has already acquired Jasungdae container terminal in Busan from HMM in 2001. The shares of HMM are now held 15.16% by Hyundai Elevator, 12% HWL, 8.69% Hyundai Construction and 6.26% by KCC. HMM is to order with HHI for 3 x 2700 TEU in 2007 delivery, and 3 x 6800 TEU in due course under a constant expansion program.
The creditor of Pan Ocean Shipping announced their bidding program to sell 51% stake in the company. Letter of Intent will be submitted by the bidders by July 9, qualified bidders will be noticed in a week thereafter, preferred negotiation party selected early Aug and M&A will be concluded in Sept. Hanjin Shipping declared no interest in bidding for Pan Ocean.
Since its attempt to establish own shipping company was abolished by strong complaints of domestic shippers, KOGAS studies the way to set up a LNG transportation company in the participation of local shipping companies on LNG, as a survival measure in the restructuring process in future.
Seven Mountains, the biggest shareholder of Seyang Shipping, increased its stake in the shipping company to 25.12% to stabilize its management rights. Seyang is to invest total KW18 bil to acquire Semo’s cruise ships and related facilities on Han River. It confirmed to have acquired Jindo, container box maker under court receivership, for KW174.4 bil.