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Korea Report - July 2004

Author : Hwang & Co Date : 04-08-09 07:38 Hit : 38343

Topics.

-Government selected Yeongi-Gonju, as locale of new capital.
-Summer labor rallies hurt the country.
-Defense budget increased in connection with reorganizing US military presence in Korea.
-Forecast of economic growth slashed.
-57 years alliance of 2 families in LG Group ended.
-KOGAS’s domination in LNG business may be eroded by end users.
-Inflation rate jumped above 4% barrier.
-Korean yards’ domination in world shipbuilding market enhanced.
-KOEXIM financed 3 LNG carriers for Maran Gas.
-New, unknown yards, made contracts for popular types of ships.
-Korea Line kept expanding in caper fleet.
-The procedure to sell Pan Ocean started.

GOVERNMENT AND POLICY

Government selected Yeongi-Gongju, some 160 kilometers from Seoul and 10 kilometers from the two metropolitan cities, Daejeon and Cheongju, as the most favorable locale of the nation\'s new administrative capital to replace Seoul. President Roh Moo-hyun and his ruling Uri Party are facing an increasingly uphill battle to save his ambitious plan, quelling opposition to his plan that he regards the rejection of the project as a no-confidence motion against him. Government\'s efforts has turned into a legal battle after a group of some 170 leading citizens filed a petition with the Constitutional Court calling for the project to be halted immediately. Popular vote showed 55% against and 40.9% for the plan. It also revealed that 26% supported Roh\'s administration in general while 59.3% said no.

Korea International Cooperation Agency has launched a joint project to open the first Korea-Afghan computer training center in Kabul providing $1 mil for the education of public workers there with necessary computer skills needed in administrative work. Suspected Chinese hackers broke into the computer systems of US military headquarters in Korea in March, possible stealing some important data. They also penetrated about 210 computers at 10 Korean government institutions, including the National Assembly.

The Supreme Court upheld a lower courts conviction of a religiously conscientious objector for violating the military conscript-xion law, sentencing one and half years prisonment.
The summer labor rallies partially paralyzed nation, as the workers in major sectors including subways, banks, LG Caltex, GM Daewoo Motor and Ssangyong Motors jointly made strikes throughout the country. Statistic said that Korea lost 111 days among 1,000 workers in production, while Japan lost 1 and USA 56 days a year. The ratio of local manufacturers’ labor costs to their sales edged up to 10.3% last year from 10.1% a year earlier.

Korea is to drastically increase the use of cogeneration, the co-production of electrical and thermal energy, over the next 10 years to secure a stable electricity supply, raising the portion of cogeneration to 3.5% of the country\'s total electricity output by 2013 from current 0.2%.
Korean researchers have hatched chickens that glow fluorescent green, by injecting green fluorescent protein into eggs that gave a green hue to the chicken\'s skin, producing transgenic poultry for the first time.
Korea‘s self-sufficiency in rice is forecasted to fall to 93.1% this year, reflecting poor crop due to bad weather last year including typhoon Maemi.

President Roh and US National Security Advisor Condoleezza Rice agreed in the meeting in Seoul to seek a diplomatic solution to end the tension over NK\'s nuclear weapons program, offering surprising gift to NK that includes a gradual lifting of sanctions and economic aid in return for a rapid dismantlement of NK’s nuclear weapons program. NK rejected.
US Secretary of State Colin Powell met NK\'s Foreign Minister Paek Nam-sun in Jakarta, to talk over NK\'s nuclear weapons program. Following the meeting, the NKorean delegation stated that 2 sides agreed a peaceful settlement of the issue through dialogue.
SKorean Defense Ministry revealed that NK is building and deploying intermediate- range ballistic missiles capable of hitting targets up to 4,000 kilometers away and has been testing its new long range ballistic missiles, the Daepodong-2.

Government reviews a budget to allocate KW 95.4 tril for the enhancement of the defense capabilities over the next 4 years, by boosting 10% every year from 2005 through 2008.
Seoul and Washington finally reached an agreement to complete the planned relocation of the US military command out of Seoul by 2008. Under the agreement, Korea is set to provide a total of 2,850 acres of land in the Pyeong Taek and Osan areas some 70 kilometers south of Seoul for the expanded military base to replace to Yongsan Garrison. Under the burden-sharing program to support the stationing of American troops in Korea, Korea allocated KW698 bil this year for 37,500 troops, which represents 3.47% of its annual budget.

A survey said, that 54% of the Koreans approve of the governments plan to send an additional 3,000 troops to Iraq, since SKorean translator Kim Sun-il was mercilessly murdered by Islamic militants, while 36.7% wanted to scrap the plan. About 50 law makers of ruling and opposition parties issued the proposal to review the plan to dispatch.

In a hush-hush government operation, about 450 defectors have flown into Seoul, aboard a chartered aircraft, from a third country in Southeast Asia where they have been temporarily hidden since escaping their NK\'s homeland. It would be the single largest group to be granted asylum in SKorea. NK blasted SK for taking in defectors, labeling the decision as premeditated abduction and terrorism in broad daylight.

ECONOMY AND POLICY

BOK slashed its economic growth forecast from its initial 5.6% to 5%, citing persistent household debt and lofty oil prices which slammed the consumer confidence index to an eight-month low.
Korean business confidence in July fell to its lowest in almost 3 years to 86.4 from 92.1 in June, as domestic demand remained depressed and high oil prices raised costs, hurting corporate earnings.

Government raised a total budget of KW50 tril to assist small and medium enterprises promote restructuring. Government spent KW87.5 tril in the first half, in efforts to kick start depressed domestic consumption
Government is to increase state bond issues and borrowing to push up the fiscal deficit to KW7.2 tril this year. The amount is more than twice the figure predicted earlier. The deficit compared to the GDP will move up 0.5% to 9.0%

Korea\'s export in July reached $21.354 bil, up 38.4% on year, breaking $20 bil barrier for 5 consecutive months. Trade surplus rose to $2.978 bil in July. Korea\'s trade account surplus for digital electronics products reached $22.13 bil during the first half of this year, with the overseas shipments of $47.56 bil, up 45.5% and imports of $25.43 mil, up 23.1% on year.
Foreign direct investment by Koreans jumped 65.9% on year to $3.5 bil in the first half of this year, on the back of a slump in domestic demand. Foreign direct investment to Korea during the first 6 months swelled close to 90% on year to $5.04 bil.

Standard & Poors rating Services confirmed the A- long-term foreign currency rating on Korea, reflecting the nations economy growth streak and improved North-South relations.
Dongwon Financial Holding and a consortium led by Britains Prudential Plc, were selected as preferred bidders for the nations 2 state-run asset managers, such as Korea Investment & Securities and Daehan Investment & Securities, respectively.
ABN Amro decided to use Korean branch as lauching base to Asian market, especially in asset management and private banking sectors.

KorAm Bank, which was taken over by Citigroup in May, delisted its shares from the Korea Stock Exchange, after Citigroup raised its stake to 99.3%. The KorAm Bank workers continued their strike for 18 days, the longest in Korea\'s banking industry, before they reached a tentative agreement with management on across-the-board future wage increases and union involvement in personnel decisions.
Foreign stakes in Korea\'s 8 major commercial banks are rising fast to an average 24.8% in the capital, up from 20.7% at the end of 2003.
Overdue payments at credit card units of Korean banks dropped to 8.5% in June from 10.3% in May, thanks to their massive write-offs of bad debts. Koreans, suffering from a debt hangover, cut their credit-card spending nearly 40% during the first half, purchasing goods and services valued at KW155.7 tril with plastic cards compared to KW254.7 tril a year earlier.

CHAEBOL

The Fair Trade Commission excluded Samsung Group from its list of large conglomerates, subject to a ceiling on equity holdings. By law, companies whose debt-to-equity ratio does not exceed 100% are eligible for exclusion from the investment restriction. Samsung is the fifth company to escape the investment ceiling, following Korea Electric (KEPCO), Korea Highway, Lotte Group and POSCO. 17 other conglomerates with total assets exceeding KW5 tril are now banned from buying stakes in their affiliates or third-party companies in excess of 25% of their net combined assets.

Samsung Group achieved KW10.5 tril of the operational profit in first half, the highest in its history, attributing to robust shipment of semiconductor chips and mobile phones. It expects same pace in second half to reach KW20 tril at the end of the year. The brand of Samsung valued $12.5 bil, 21st in the world, following Coca Cola, MS, IBM, as 1st, 2nd and 3rd.
SEC recorded its second quarter net profit nearly tripled and a ten-fold increase in its annual dividend on year. Sales rose 52.3% to KW14.9 tril on the net profit of KW3.13 tril, up from KW 1.1 tril in the second quarter last year. SEC held a No 1 rank in the world market share of Flesh memory and DRAM chips. It recaptured No 1 position in PC as well, leaving out Hewlett Packard.

The 57-year alliance of 2 founding families in LG Group, Koo and Huh, ended with the launch of GS Holdings Corp led by Huh family, taking the group\'s 9 energy and distribution units, including LG- Caltex Oil, LG Mart and LG Home Shopping, to become the nations seventh-largest conglomerate, with assets worth KW16 tril.
Striking workers shut LG-Caltex oil refinery, which accounts for 28% of Korean fuel production, reducing supplies to plastics makers, transport companies and power stations.
LG Construction and 3 companies from Spain and Turkey won a $186 mil order from Turkey Petrol Rafinerileri to build an oil refinery in Turkey.
LG Electronics has been picked by Orange, which is owned by France Telecom, with Sony Ericsson, to supply its first order of third-generation handsets.

POSCO signed a contract with Indonesia Tangu LNG consortium to import 550,000 tons of LNG annually for 20 years from mid 2005 directly, not through KOGAS. It will be supplied to Pohang and Kwangyang Steel Mill through its own Kwangyang LNG terminal.
POSCO is to invest a $660 mil steel plant in China with Benxi & Iron Steel Group, China’s fifth-largest steel mill. Construction will be completed in March 2006.

HMC has become the worlds second automaker to export more than 10 mil vehicles, reaching the landmark in 28 years after it shipped 6 Pony hatchbacks to Ecuador in June 1976. INI Steel consortium, HMC Group’s steel units, concluded the contract to acquire Hanbo Steel Mill at KW880 bil.
Ssangyong Motor has reached a tentative agreement with its trade union to end a 12-day strikes. The agreement included a 6.8% pay rise and incentives and bonuses equal to 3 monthly wages and job security. It paves the way for China\'s state-owned Shanghai Automotive to acquire the Korea\'s fourth-largest carmaker.

Creditors of Hynix Semiconductor have approved a plan to reduce about KW1- 1.1 tril of the company\'s debt, allowing Hynix to buy back collateralized debt and new loans at 96% of its face value, while purchasing unsecured loans at a maximum 70% of their face value.
Shareholders approved Hynix to sell its non-memory unit to Citigroup for KW945.2 bil, which will be used to repay debts and fund new operations.
Hynix recaptured the second position in the world DRAM market share with 16.9%, after SEC\'s 27.7%, while Micron holds 15.2%, Infineon 14.4% and Alfida 6.4%.

Korea\'s gas industry, the worlds second biggest importer of LNG after Japan, remains bedeviled by uncertainty and an absence of clear planning, facing a huge LNG shortfall in the incoming decade. Estimates of the size of the annual gap between gas supply and demand range from 17.5 mil tons to 22 mil tons by 2015, almost equivalent to this years consumption of 21.5 mil tons. For instance, the contract with Indonesia for 2.3 mil tons import will be terminated by Nov 2007, and a new contract for about 5 mil tons must be made by end of this year, but it seems infeasible due to the delays of the bill for restructuring in gas industry.
Korea\'s gas industry sees a change in the gas import and distribution system, monopolized by KOGAS for quite a long time. POSCO signed a contract with Indonesia to directly import 550,000 tons of LNG annually for 20 years from 2005. LG Group was approved its plan to import 1.5 mil tons of LNG a year from 2008 by itself for LG Caltex, LG Power, LG Energy. SK also plans to handle its own gas demand by itself. KEPCO, one of the biggest customer of KOGAS, seeks a way to directly import the gas and to invest to foreign gas field to save the costs in 2-3 years time.
KOGAS posted a KW33.1 bil loss in the second quarter, compared with a profit of KW10.6 bil in the year-earlier period, as it was unable to pass on higher fuel prices to customers.

MONETARY AND ECONOMIC INDICES

KOSPI showed promising start at 778 in the beginning of the month, but slipped all the way to the end to 735, reflecting a series of negative factors including poor economic data, fall in trade volume, rise in oil price, sharp decrease in reserved fund to sell the shares and collapse of Dow Jones index below 10,000 level first time in 2 months. Foreign investors held local shares valued at KW152.2 tril at the end of June, down 2.3% from a month ago.
The exchange rate of KWon kept in the box of 1148-1170 against USDollar, with limited fluctuation by the outlook on the timing to raise US interest rates. Korea\'s foreign exchange reserve has kept increasing to $168 bil at the end of July, from $167.03 at end June. Foreign currency savings at 8 nationwide banks during first half leaped to $16.76 bil, up 39.2% from the end of 2003, attributed to higher interest rate.
Consumer price index jumped 4.4% on year in July from 3.6% in June, breaking 4% mark for the first time in 16 months, attributed to surge in oil and food prices and public transportation fees, raising fears about stagflation. The yield on 5 years corporate bonds kept lowered from 4.84% at the beginning to 4.65% at the end of the month. Korea\'s seasonally adjusted jobless rate marked 3.5%, unchanged at a 7-month high in June, as hiring in services and manufacturing helped counter the impact of more students entering the workforce.

SHIPBUILDING AND SHIPPING

Korean shipbuilders have enhanced their ruling power of the market, by dominating high valued new buildings like LNG carriers. HHI, DSME and SHI secured 29 LNG carriers out of 32 ships recently ordered. They are preparing themselves for further domination by developing new types of design and improving production system.
HHI and 8 other Korean shipbuilders won 16% more orders on year in the first half, taking their combined contracts to a record of 9.06 CGT with 256 ships, and constructed 4.79 mil CGT, up 26.1% on year. The order book is now filled with 847 ship of 30.67 mil CGT, surpassing 30 mil first time. Koreans holds 56.2% share in the world order.
KOEXIM agreed to finance 3 units of LNG carriers to be built by DSME for Maran Gas, providing about $440 mil equivalent to 70-80% of total contractual price.

HHI settled labor-management negotiation without entanglement in 10 consecutive years, accepting 5 days work week system with no deterioration of working conditions. HHI received orders worth $8.334 bil, up 81.2% on year in first half. HHI agreed to build 2 x VLCC and 2 x 84K VLGC for KOTC, Arcadia 2 x Suezmax, and MOL 1 x 83K LPG. HMD secured orders from Barclay Shipping for 3 x 47K ice 1A and 3 x 37K PC, and Interorient Nav 5 x 37K PC.

DSME received orders from Teekay Shipping for 3 x 151.7K LNG, Sovcomflot 1 x 146K LNG, MISC 2 x 7900 TEU, Lundqvist Rederierna 1 x 115K tanker, VELA 2 x 50K PC, and KOTC 2 x 70K and 1 x 100K coated tanker.
SHI completed the construction of the world’s largest container ship of 8,500 TEU class in 16 months after contracted with Seaspan. SHI signed contract with Geden Line for 2 x 113K ice 1A tanker and MODEC+IMC 1 x FPSO.

INP made a contract with Crystal Pool for 2+2 x 10K stst ice 1A chemical. Samho signed the contract with Modian for 2+2+2 x 12.8K coated PC. Daesun is known to sign LOI with Parakou and Jiangsu Ocean for 2 each x 1043 TEU. In addition, there have been number of rumors about the contracts for new comers to build some popular ships. 21st Century is reported to sign the contract with Perosea for 3 x 13K chemical carrier, and Shinan with Barclay for 5+15 x 5.5K IMO III, and Sungdong with Marmaras Nav for 8 x 76K bulker, and Dongyang with Essar in final nego for 6 x 50K PC.

Iraqi terrorist warned to attack 9 shipping companies in the world including Hanjin, putting them into highest alert. 49 ships are currently operating in the Middle East area under Korean management. Government ordered crew not to leave the ship in the area, asking USA for special convoy when needed.
Angelicoussis won the order from recent Qatar RasGas II Project, with little experience in LNG operation, but on the merit of early delivery secured by their speculative order. Tsakos Energy Nav, Dynacom and Taiwan Maritime Transportation are likely following the case.
Korea Line has been active in the market to secure caper fleet, by ordering 2 x 170K with DSME for mid 2006 delivery, 1 x 176K with Universal for March 2005, and acquiring 1 x 177K resale from Namura for 2006 delivery. It is also actively involved in the purchase of second hand capesize bulkers.
Creditors selected 8 qualified bidders out of 13 contenders for the acquisition of Pan Ocean Shipping, including Korea Line, Janggum Shipping, Seyang Shipping, Dongguk Steel, Kumho Asiana Group, LG Group and STX Group together with foreign interest such as Zodiac and NYK. Pan Ocean has graduated from the court receivership in 2002 and normalized business thereon achieving the sale of KW1.98 tril on net profit of KW43.1 bil in 2003, operating about 80 ships under own management.