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Korea Report - July 2005

Author : Hwang & Co Date : 05-08-16 16:27 Hit : 34799

Topics.

-President Roh proposed opposition party to take political power for the reform of electral system in return.
-Eavsdropping by authority shook the country.
-President of Seoul National University stands against government level off educational policy.
-Pilots of Asiana Airline continued aristocrtic strike.
-4th 6-party talks on NK’s nuclear weapon program started in Beijing.
-KOGAS signed 5.0 mil tons of LNG long term import contract.
-China revalued yuan and floated it in the market.
-Sovereign Asset Management left Korea, after collecting tremondous profit.
-Hite Brewery took over Jinro Soju.
-Family feud in Doosan Group.
-POSCO completed its own LNG receiving terminal.
-POSCO is to be listed in Tokyo bourse.
-Korean Steel Mills cut the production because of pouring in Chinese products.
-KOSPI soared up to 11 years high.
-Korea’s 3 major yards swept away the 12 LNG unit contract from Qatar.
-STX Pan Ocean successfully floated its share in Singapore bourse.

GOVERNMENT AND SOCIETY

President Roh Moo-hyun proposed the main opposition Grand National Party to lead the formation of his envisioned unified government system and asked in return for the GNP's cooperation in his initiative to change the electoral system, saying "I and the ruling party will hand over political powers to the GNP, and in return, ask for cooperation in revamping the electoral system to resolve the chronic political regionalism." President Roh stirred controversy last month by suggesting that the ruling Uri may have to seek alliances with minor parties in order to overcome its quickly diminishing public support and mounting problems it faces in passing laws. Opposition parties, spearheaded by the GNP, fiercely criticized Roh's suggestion, urging him to focus on reviving the sagging economy instead of talking about an "irrational" political maneuver. President Roh condemned GNP for flatly refusing his "honest proposal.

An explosive scandal on eavesdropping and bugging has shaken the country. Prosecutors confiscated 274 tapes which recorded by national spy agency in secret the private talks of influential figures in the society during ‘90s and early 2000s. One of the tapes was revealed shocking private conversations allegedly held between the nation's industrial giant Samsung Group and Korea's current envoy to Washington, Hong Suk-hyun, who was chairman/CEO of the daily JoongAng Ilbo until February this year, regarding financial support for a presidential candidates in 1997. Ambassador Hong, offered his resignation over allegations he delivered illegal campaign funds in the 1997.
The prosecution is considering launching an investigation into alleged wiretapping and slush fund activities dating back to 1997 after a leading civic group filed complaints. Allegedly rampant wiretapping practices by the agency are not only sending shock waves through the nation, but the fact that leaks came from ex-agents is throwing into question on the agency's integrity, dealing a severe blow to its efforts to transform itself from an organization that catered to the power brokers into an intelligence arm that serves the people. The biggest concern of the case is what would be the effect to the society when all 274 tapes come to public, after such fuss with only one tape opened.

Prof Chung Un-chan, President of Seoul National University, pushed ahead with his admission guidelines, rejecting the educational system demanded by political circle to level off in entrance examination, in the face of calls for his resignation by the ruling Uri Party and civic groups, who have harshly criticized his plan on the grounds that it would endanger the system for the students to have equalized chance of entering universities and create a specialized private education structure to prepare examination. Tension is building between the government and the nation’s top rated SNU as its professors association demanded the ruling legislative to stop interfering with its school.

Unionized pilots at Asiana Airlines, the country's second largest carrier, began an indefinite strike from July 17 at the peak of holiday season, after they failed to reach an agreement on their demands including the extension of the retirement age to 58 from the current 54, participating in management decisions, shortening flying time and more days off. Asiana has 826 pilots, 310 of whom are non-union pilots. As the walkout continued for a 12th day, Asiana canceled 116 flights out of total 307, with direct loss of KW200 bil as of end July, giving the damage to national economy multi tril of KWon. The management had been determinded not to surrender to the unrealistic demands of aristocratic union.

Prof Hwang Woo-suk, a cloning authority in the world, plans to set up an international stem cell bank in Seoul in Oct with world-famous stem cell academics, in a move to transform the country into the center for global stem cell research.
The officials have reported 34 farmers have died since June from the illness and 174 suspected cases, blamed on the bacteria streptococcus suis in Sichuan, China, where farmers handled or butchered infected pigs in dozens of villages.

IOC voted to retain Taekwondo, the Korean traditional martial art, as an Olympic sport during a secret ballot in Singapore, while baseball and softball were dropped.
The Texas Rangers traded Korean pitcher Park Chan-ho to the San Diego Padres for slugger Phil Nevin. Park is 8-5 with a 5.66 ERA in 20 starts this season.
Meena Lee closed with 3-under 69 for a one-stroke lead victory over playing partner Katherine Hull at Canadian Open of LPGA tour in Glen Arbor course, after becoming runner-up twice earlier this season.
Jang Jeong, 153 cm tall, became the fourth SKorean to win a women’s major when she scored a wire-to-wire victory in the LPGA British Open at Royal Birkdale. Jang finished at 16 under par, while Sweden’s Sophie Gustafson finished second and both Michelle Wie and Kim Young from Korea, were tied for third place.

NORTH KOREA AND NATIONAL DEFENSE

The fourth installment of the six-party talks opened on July 26 in Beijing, after a 13 month break. Participants determinded to operate meeting to get some conclusion with flexibility without setting the closing date. SKorea and USA have agreed to combine proposals to try to convince NK to abandon its nuclear weapons program, with somewhat the exchange of energy aid and security guarantees. Chief delegates from USA and NK met for one-on-one talks 3 times in 4 days during the session, very unexpected publicized encounter.
USA and NK remain parallel, with the former promises security assurances and economic aid in return for verifiable nuclear dismantlement, while the latter demands normalized relations with Washington for it to dismantle. Another problem encompasses their conflicting views on whether denuclearization should include both weapons and nuclear power. SKorea pledged free energy aid to NK by supplying of 2.0 mil KW electricity, which costs KW1.55-1.72 tril for facilities and fee of KW1.3 tril, on the condition that it gives up its nuclear weapons ambitions. No concrete resolution was made before the end of July.

A world aid agency reported NK's chronic food shortage could deteriorate into widespread famine similar to the mid-1990s when an estimated 1 mil NKoreans died from starvation. South and North Korean officials met to try to work out differences on major bilateral economic projects, including Seouls massive food aid to the North, who requested 500,000 tons of food. South and North connected a fiber optic cable link across DMZ to allow video conferencing for the families separated during the 1950-53 Korean War, as a part of the plan to allow families to undertake video reunions around Aug 15 when Koreas mark 60th anniversary of the liberation from the Japanese colonial rule. 2 Koreas agreed to officially open railway and road links in late Oct. Across the 248-kilometer-long DMZ separating the peninsula, they will built 2 railways linking Seoul with Pyongyang and to Mt Geumgang, with 2 roads parallel to the railways.

Government considers downsizing the 680,000 member military by one-fourth by 2020 and stream lining its combat organizations in an effort to carry out comprehensive reform of its armed forces. US defense chief was quoted as saying that USA has no plans to cut its troops level in SKorea beyond 25,000 after 2008. USA has already reduced the number of its troops to 32,500 by redeploying 5,000 to Iraq last year, and plans to cut the number further to 25,000 by 2008.

ECONOMY AND POLICY

The Korean economy expanded 3.3% on year in the second quarter, propelled by a rise in consumer spending, construction investment and corporate spending. The expansion topped the 2.7% GDP increase rate in the first quarter. Korea Development Institute, a state-run think tank, revised its 2005 growth forecast for the economy down to 3.8% from 4%, after the government downgraded its growth target to 4% from 5%, citing high oil prices and still-weak domestic demand. Standard & Poor's raised Korea's sovereign rating by one notch to ‘A’ from the current ‘A-‘, which was the highest rating in 7 years, citing greater stability in the financial sector and increased monetary flexibility in Korea.

Korea’s export rose 11.4% on year in July to $23.39 bil, with trade surplus of $1.3 bil, despite the strike in Asiana Airline and high oil prices. Korean exports of information technology products rose 0.9% on year to $6.45 bil in June, helped by increased shipments of semi-conductors and mobile phones. Worldwide shipments of personal computers rose 16.6% in the second quarter as surging demands and price hike. Agricultural exports rose 7.1% on year to $1.02 bil in the first half. Domestic steelmakers export volume in the first half rose 8% on year to 8.14 mil tons, while their sales in China, the largest export destination, plummeted 10% on year to 2.42 mil tons.
The current-account surplus fell 33.9% on year to $8.7 bil in the first half of the year, as Koreans increased their overseas spending.

Dubai crude has increased from $29.50 in the first quarter of last year to a record high of $61 per barrel in July. Lofty oil prices brought a fresh weakening of KWon to magnify the threat to Korea’s economy. Korea has finalized a long term import contract for 5 mil tons of LNG at the price about 38% less than what previous deals cost. Korea will begin to import in 2008, 2 mil from Yemen, 1.5 mil each from Malaysia and Sakhalin, saving the money around KW13 tril over 20 years.

In the night of July 21, China ended its decade-long currency peg against USDollar and allow the Chinese Yuan to float against a basket of unidentified currencies. China sets its first step to make Yuan an international currency by the revaluation, marking the beginning of a decline in the international importance of JYen. BOC revalued the Yuan by 2.1% to 8.11 against USD and allowed the Yuan to fluctuate by 0.3% in daily trading, to protect Chinese exporters against profit erosion, but a revaluation of around 10% is said to be needed to correct current imbalance. China's GDP rose 9.5% on year in the second quarter after climbing 9.4% in the first quarter, as exports surged and investment in power plants, coal mines and other fixed assets grew. China's full year trade surplus is expected to hit more than $80 bil. KWon leapt 1.4% to KW1,021.30 to its biggest daily jump in 5 months in the wake of Yuan revaluation.

KOEXIM has agreed with the Indonesian government to extend a $20.2 mil loan to help Jakarta establish an anti-crime information computer network. Korea Exchange Bank signed a contract to buy another 15% stake in its Indonesian banking unit, Jakarta-based PT KEB Danamon, raising its ownership to 99. Shinhan Bank completed the transaction of $350 mil worth of issuing upper Tier 2 international bonds in London market.

Hermes Pensions Management faces the first criminal investigation of an overseas investor in Korea after the authority filed a criminal complaint with the Seoul Prosecutors Office, accusing the London-based fund to have made unjustifiable large capital gains from the sale of its stake in Samsung Corp last Dec, shortly after intentionally hinting at the possibility of an acquisition attempt on Samsung.

CHAEBOL

Samsung Electronics (SEC) recorded operating profit at KW1.67 tril, poorer than expected, and net profit tumbled 46% on year, due to weak semi-conductor and flat-panel prices and the strong domestic currency, but its performance is expected to improve in the third quarter. Moody's raised SEC's longterm bond ratings 2 notches from ‘A3’ to ‘A1’, surpassing Korea's sovereign ratings ‘A3’. SEC was elected by Business Week as world most innotive 20 firms, ranking at 12th for its brand leadership and readily forwarding new creative products. Fortune magazine included SEC in world 50 largest companies for its $71.9 bil sale at 39th, with Hyundai Motor 92nd.

Sovereign Asset Management completed the sale of its entire 14.28% stake in SK Corp, citing their disappointment on corporate governance reform in SK. It has collected about 430% profit of KW1 tril, since it invested the company in April 2003.
SK Corp's second quarter profit rose 40% to KW415 bil on increasing sales of petro-chemical products and higher output from oil fields in Libya and Peru, while operating profit declined 23% on lower refining margins. SK Corp succeeded the development of oil field in Brazil, for the first time of Korean company. Oil reserve in BM-C-8 field confirmed more than 50 mil barrel. SK has 40% stake in the mine, for the commercial production for 27 years from 2007. SK is involved in the oil development of 53 project in 23 countries. SK Telecom is to extend its self-imposed market share ceiling for another 2 years, keeping its share below 52.3% until the end of 2007.

Hyundai Motor (HMC) announced a second-quarter profit increase of 24% on year totaled KW613.19 bil on strong non-operating profit and operating profit came to KW457.86 bil, down 35.7%, while sales edged down 3.3% to KW6.95 tril, due to higher costs of steel and a stronger KWon. HMC topped the sales of foreign cars in Russia during the first half, doubling its sales on year to overtake Japanese brands. HMC sold 42,431 cars to take the biggest market share, followed by Toyota with 29,708 units. Beijing HMC marked its sales almost doubled on year in the first half, helped by demand for its Elantra model, boosted its sales by 95% on year to 109,564 units.

LG Electronics (LGE), Koreas second-largest electronics maker, reported its net income for the second quarter dropped 69.5% on year to KW150.6 bil, operating profit fell to KW144 bil from KW393 bil, with revenue dropping 7% to 5.6 tril, due to weak margin on handset sales in intensifying competition in a slowing industry. LGE has completed building a handset-making factory with annual production of 6 mil mobile phones in Sao Paulo, Brazil, setting the stage for the company to make inroads to South American market. LG Chemical won a $300 mil contract to supply battery packs for laptop computers to Hewlett Packard. LG Philips LCD plans to issue 26.85 million common shares in American Depositary Receipts during the third quarter of this year.

Korea's overseas construction orders soared 74% in the first half of 2005 on year, largely thanks to booming demand from the Middle East with oil money. Hyundai Construction won the contract from Iran National Petrochemical for Olefin production plant, worth $567 mil out of total $1.2 bil project, scheduled to complete in 4 years. SK Engineering and GS Engineering have jointly secured a $660 mil deal to build a plant for Aromatics Thailand Public Co at the Map Ta Phut commercial complex.

Hite Brewery is to cut its stake in the takeover of Jinro Soju to 41 % from 52.2% by having its consortium partners increase their holdings. The Fair Trade Commission conditionally approved for the KW3.43 tril takeover, the largest merger in Korean corporate history, that Hite may not raise prices of alcoholic beverages beyond increases in national consumer prices for the next 5 years.

Doosan Group dismissed its former chairman from the top posts of its 2 flagship subsidiaries amid a growing family feud over control of the nation's 10th largest conglomerate. Park Yong-oh was fired as CEO of Doosan Industrial Development and Doosan Corp, the group's holding company. After being replaced by his younger brother, Yong-sung, he lodged a complaint with the prosecution, alleging the group had embezzled money over the past 20 years to create a secret fund of KW170 bil, further claiming his brother had oppressed union activity at the group and had illegally taken KW80 bil out of the country. Doosan Group has described the complaint as "total nonsense" and said it is considering a lawsuit against it.

POSCO posted a net profit of KW2.57 tril in the first half, up 57% on year and operating profit soared 60% to KW3.5, thanks to increased sales of high-value-added products and rising steel prices. POSCO's board approved to buy back 3.5 mil of its shares before it is listed on the Tokyo Stock Exchange between Nov and Dec this year, as the first Korean company to publicly traded in Tokyo.
POSCO completed the country’s first privately built terminal for receiving LNG at its Gwangyang mill. The terminal, costing around KW322.6 bil, has a storage capacity of 1.7 mil tons of LNG a year. It will directly import 1.15 mil tons of LNG, which will be distributed to POSCO, Kwangyang Steel Mill and K Power Plant of SK Group.
POSCO plans to cut production this year by 300,000 tons, as the domestic inventory of steel products is on the rise because imports from China have swelled while overall steel demand is stalled as the construction sector remains sluggish. The share of Chinese products on the market climbed rapidly to cover 40 percent of imports. Hot-rolled coil and wire rod from China increased almost five-fold and 1.5-fold, respectively, on year.

KOGAS has failed again to get governmental approval for its new president among 5 candidates it recommended. KOGAS marked operating loss of KW29 bil in second quarter from KW439.5 profit in first quarter, with sale of KW1.1727, 52% down on quarter and net loss of KW36.1 bil, due to shrinkage of income due to decreased gas rate. KOGAS slated to establish joint venture transportation company for LNG by Oct for the project to import 5.5 mil tons of LNG per year.

MONETARY AND ECONOMIC INDICES

The composite index of Korean Stock Exchange continued their bullish run in July, starting at 1018, kept surging to end the month at 1111, the highest in near 11 years, thanks to government's tough measures to cool down the property market, the resumption of nuclear talks with NK, the rebound in NYSE and upgrading Korean sovereign rating. Investors are flocking to short-term investment funds, as recent increases in bond yields and a bullish stock market have deprived them of attractive investment vehicles. The deposit of money market funds (MMF) stood at a record high of KW80.17 tril as of July 15, up KW10.30 tril from the end of last month.
KWon started the month at 1033 against USDollar, fluctuated in the box of 1031-1054, due to surging share prices, government’s interferences and revaluation Chinese Yuan, to end the month nose-diving to 1026. Korea's foreign exchange reserve rose $700 mil in July to $205.69 bil, turning into increase ending 3 consecutive month of fall.
BOK left its overnight call rate target at 3.25% for the eighth straight month, placing a greater priority on helping an economic turn-around. The yield on 3 years corporate bond surged through the month from 4.46% to 4.63%. The consumer prices in July rose by the slowest pace in nearly 3 years, only to 2.5% on year, despite soaring oil prices. Korea’s jobless rate reached 3.6% after climbing 0.2% up on year.

SHIPBUILDING AND SHIPPING

Korean shipbuilders have recently enjoyed a number of joyful facts, namely decreasing material cost, weakening KWon's value, continuously climbing ship's price and soaring share prices. They are confident on the market development in the days to come, as they have sufficient orders to support them until the end of 2008 and gas carriers will make them survive in any adverse situation. But there is a certain indication that the balance of supply and demands starts to be rapidly tilting to over-capacity, casting the shadow in the future market. Owners' activities became evidently slow, waiting for the price down. Shipyards may maintain the building price for next few months, before they realize the demands are really faltering. The late delivery in late 2008 or even in 2009 is another factor to make the market slow, leaving the owners as well as the builders reluctant to commit further. Korea’s 3 majors swept away 12 units of 210K LNG carrier orders for Qatar Ras Gas III project worth total $2.9 bil, 3 ships by HHI, 4 for SHI and 5 DSME.

HHI secured orders from Teekay for 1+1 x 155K LNG, to be built 1 in HHI and 1 in Samho, Claus Peter Offen 4 x 9600 TEU, NITC 3 x 300K VLCC, Irano Hind 1 x 159K and Navigator Gas 3 x 22.5K LPG carrier. HHI also contracted with Total for a FPU with capacity of 90K oil and 1.70 mil sqm LNG to be used at at offshore West Congo. HHI Group got the orders in the first half worth above $11 bil, the highest in the history. HHI booked 66 units, among which 42 ships are container carriers, of 4.9 mil GT worth $6.2 bil, HMD 59 units of $2.74 bil and Samho 26 of $2.5 bil. Its backlog of orders reached 255 units of 17.8 mil GT worth $18.5 bil. HHI ended collective negotiation with labor union without dispute for 11 consecutive years.

DSME has been also busy to bag the orders. It agreed with Exmar for 1 x 15.9K LNG-RV, Gulf Marine Management 2 x 84K LPG, Ghassan Ghandour 2+2+1 x 80K VLGC, Maran Gas 1 x 84K VLGC and Hamburg Sud 4 x 3200 TEU container ship.
SHI has delivered 2 units of the world largest container ship of 9200 TEU for MSC in 16 months after the contract signing. Templeton Asset Management lowered its stake in SHI to 6.29%, after selling 1.26% in the market.

STX got the order from NYK for 3 x 2850 TEU box ships. Fearnley Fonds acquired 12.9% stake in STX Engine very swiftly, as they did with the share of Korea Line last year. Waxford Capital also collected 7.2% at the same time. Since Charles Davidson is known the biggest share holder of both funds, the market is watching the background of such action. STX Engine has total 43.74% in friendly league.
Daesun signed the contract with Cosmoship for 2 x 1043 TEU. INP bagged a contract with Hisafuku Kisen for 2 x 13K IMO II III chem carrier.

John Fredriksen has increased its holding in HMM to 13.57% from 10%, through Geveren trading, becoming second largest share holder. Since DnB NOR Bank holds 3.34%, market watches the movement of Norwegian funds for the sign of merge.
STX Pan Ocean floated its 600 mil shares, about 40% of its total stake, in Singapore Stock Exchange at SGD0.90, which is nearly 30% lower than the top end target of SGD1.27, because of negative effect on investment sentiments after terrorist attacks in London. It was the second largest floatation this year. The performance on its first day was very positive, gaining 19% at top in its trading debut on July 14, against initial concern over a slowdown in global shipping, totally opposite the experience of COSCO in its Hongkong debut in June at 10% drop with no recovery sofar.