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Korea Report - August 2004

Author : Hwang & Co Date : 04-10-14 10:06 Hit : 39324

Topics.

-Constitutional Court ruled National Security Law is correct.
-Summer labor rallies ended after labor unions hanged white flag.
-Korea and China are in conflict over ancient history.
-Korea’s consumer’s confidence dropped to a 45 month low.
-BOK cut call rate.
-Dymler Chrysler sold its stake in HMC.
-Hynix is to invest $2 bil in China for 2 chip plants.
-Korea’s inflation hit 4.8%, 37 month high.
-Korean Navy order KDX-III destroyer to HHI.
-Ship yard profitability worsened due to material cost.
-HMM aggressively expand its fleet.
-Korea Line still under possible hostile M&A.

GOVERNMENT AND POLICY

The Constitutional Court ruled that a National Security Law, which penalizes praise or sympathy for NK, is constitutionally correct, serving a hard blow against to reformists who want to scrap the law.
National Assembly overwhelmingly, 208 voting for to 61 against, approved progressive judge Kim Young-ran as the first woman justice of the nation\\\'s Supreme Court.

The summer rally of labor union has ended after labor unions are hanging the white flag, reflecting public sentiment against the strike of high waged workers and internal conflict in the labor organization between hard and soft liner. The strikes in LG Caltex ended after the labors returned to their job under no condition. Kolon labor union returned to their jobsite, after 2 months strike, causing a special loss of KW20 bil and due punishment to the leaders of strikes. Seoul Subway Corporation has heavily penalized the leaders of illegal strike, including the dismissal of head of its union.
Wages for salaried workers in the first half of this year grew 4.5% at the slowest pace since 2001, receiving KW2.15 mil a month, as the job market had a net loss of 18,000 positions, the largest drop since the 1997-98 financial crisis. The symptoms of senility in Korea\\\'s manufacturing sector has been growing fast to the average age of 36.3 years old aging 2.3 years in 8 years.

Korea and China are in conflict over the history of Goguryeo, a kingdom which stretched from the upper Korean Peninsula into what is today\\\'s Manchuria in China between 37 BC - 668 A.D. Chinese authorities have acknoweledged all the way that Goguryeo and its successor Balhae belong to Korean history. But they suddenly claimed those 2 ancient dynasties were belonging to Chinese history. Amidst amounting anger in the public, Korean government conveyed its concern over China\\\'s attempts to distort early Korean history and urged Beijing to resolve the bilateral dispute over the issue with sincererity. After months of diplomatic rows and following negotiations, Seoul and Beijing reached an agreement in which Beijing vaguely pledged not to put its assertion over Goguryeo in its history textbooks as well as to stop such claims by the central and provincial governments. Chinese President Hu Jintao sent a message to President Roh that the 2 countries can settle their historical dispute “in long-tem and strategic perspective\\\", after the 2 sides promised to make joint efforts to end their row over Goguryeo in a vague five-point verbal understanding, which failed to abate South Korean public anger at China’s history distortion.

The nation\\\'s rival political parties collided head-on as the government announced the site, Yeongi-Gonju in South Chungcheong Province, for Korea\\\'s new administrative capital. The GNP, opposition, described it as \\\"invalid and illegal.” The ruling Uri Party reaffirmed it would press ahead with the project under a capital relocation law passed by Parliament last year. A media reserch revealed that public opinion is increasingly against the plan from 51% in early July to 57.4% in early Aug.

Korea plans to put an end to the system of purchasing rice from farmers at a higher price than the market. Instead, government is to introduce a public rice reserve system as a measure to ensure a stable supply line in preparation for wider agricultural market openings.
The amount of land in Korea devoted to rice growing has shrunk to the smallest size in the history. Korea and China failed to narrow their differences over the opening of Korea\\\'s rice market, and both sides were sharply divided over whether to extend Korea\\\'s right to keep its quota on imported rice at 4% of domestic consumption.

Korea ranked 11th among OECD countries in GDP with $605.2 bil, 30th in the world in per capita GDP on $12,628 and 5th in OECD in consumer\\\'s price index of 3.6%.
Korea\\\'s per capita tax burden has reached nearly KW4 mil. Corporate tax collections are projected to sink 7.9% this year on year, the first annual drop since 2001. Monthly average income of urban working households with 2 or more members was KW2.97 mil in the second quarter, up 5% on year. The increase rate was the lowest since the second quarter of 2003.
The temperature in Seoul reached 36.2 degree C on Aug 10, the highest in 10 years.
Korea is increasingly victimized by air pollution flowing from China. 40% of sulfur dioxide and 49% of nitrogen oxide in Korea were reported to be \\\'imported’from China between 94-98.
The number of babies born in Korea last year dropped to a record low despite a slight gain for the fertility rate. There were 493,500 newborns, the lowest figure since the country started compiling data in 1970, compared to 494,600 in 2002.

NORTH KOREA AND NATIONAL DEFENSE

US President Bush announced plans to recall as many as 70,000 troops from Cold War-era bases in Europe and Asia as part of a global rearrangement of forces. Korea proposed Washington to complete its plan to downsize the number of its 37,500 troops by one-third in SKorea by 2008, 3 years later from its announced date. USA began to pull out 3,600 troops it is deploying from Korea to Iraq.
An armed Islamic militant suspected of al-Qaeda links has threatened to attack South Korean troops and nationals in retaliation for the dispatch of more than 3,000 soldiers to Iraq.

NK boycotted a scheduled economic meeting, claiming a massive defection of 468 NKoreans to SKorea last month. Despite the nuclear standoff and the chilling of relations with NK over a recent mass defection of NKoreans, the number of SKorean tourists visiting a scenic Mt Geumgang in NK is on the rise.
Japan is expected to send $47 mil of humanitarian aid to NK, fulfilling a pledge PM Junichiro Koizumi made when he visited NK in May.
Government revealed the GNI of NK as $17 bil in 2002, while South posted at $477 bil. Per capita GNI showed $762 in NK agianst $10,013 in South in 2002.

ECONOMY AND POLICY

BOK expects economic growth to taper off in the second half to 5% from 5.4% in the first, resulting in a full-year pace of 5.2%.
Korea\\\'s corporate confidence for business in the fourth quarter fell to its lowest level in nearly 4 years at 79 from 89 previous quarter, amid concern that the economy will worsen.
Korea\\\'s consumer confidence in July dropped to a 45 month low, with the consumer expectation index dropped to 89.6 from 92.2 in June.
The government plans to scrap its special sales taxes on 24 high-end goods, such as projection TVs, air conditioners, golf clubs, motorboats and jewelry, as early as this month as a step to stimulate domestic consumption.

Exports to USA increased 27.09% on year to $22 bil in the first half of the year, helped by growing shipment of cars and cellular phones, making Korea USA\\\'s 7th-largest trade partner.
Korea\\\'s technology-related deficit widened to $2.42 bil last year from a deficit of $ 2.08 bil in 2002, as manufacturers imported more equipment and components to make export items such as mobile phones and semiconductors.

The BOK unexpectedly cut its call interest rate for the first time in 13 months from 3.75 to 3.5%, 2 days after USFRB raised its rate from 1.25 to 1.5% on Aug 10, as worries about sickly demand and high oil prices outweighed pressures to tame inflation. Morgan Stanley commented that BOK\\\'s decision to slice its benchmark rate would unlikely have any significant impact as the real interest rate has already dipped to negative territory.

After the oil price renewed its all-time record with WTI to $48.70 and Dubai crude to $39.86 per bbl, because of explosive increase of global oil demands, the limit of OPEC production, problem with Yukos in Russia, fall in US oil stock and terror on oil production facilities, oil price somewhat stablized on the news that President of Venezuella survived from national recall vote and Saudi would increase its output, but without easing the concerns over the fluctuation of energy prices in near future. A Korean institute warned that, if Dubai crude keeps its price at the level of $37 per bbl, Korea\\\'s import will be increased by $8.83 bil and export fall by $3.16 bil in the coming 12 months, causing third oil shock to Korean industry. As soaring global oil prices rapidly erode profits, major industries are appealing to the government for short-term relief, including a reduction on sales surcharges imposed on petroleum products, but the government is taking a wait-and-see attitude instead of immediate action, as the national budget already is running a deficit due to earlier tax reductions to help stimulate the economy.

Foreign stake in Kookmin Bank and Hana Bank reached 77.7% and 64.5% respectively on Aug 10 following 8 days buying streak by foreign investors, the highest in the history.
Merrill Lynch Securities has signed a deal with LG Card to invest $400 mil in the heavily indebted credit card issuer.
33 foreign banks in Korea, led by Citigroup Inc, increased their profits and market share during the first half, with combined net profit of KW318.9 bil, 30.2% up on year.
Foreigners are reported to own about 17% of upscale office buildings in Seouls major business districts. In the first half of this year, the major buildings in Seoul worth KW200 bil has been sold to foreign investment fund. Deka Immobilien Investment GmbH, German investment fund, purchased Seoul Security Building in Yeouido for KW95 bil.

Altogether 3,759 persons filed for bankruptcy with the court in the first half of the year, and the number is expected to soon pass the record of 3,856 in 2003. Overdue payments at Korea\\\'s 6 credit-card companies rose for the first 5 months in July to more than 11% of their total assets from 10.9% in June. The number of dilinquent in July rose obver 3.7 mil.

CHAEBOL

The Fair Trade Commission prohibits the 51 biggest groups with assets exceeding KW2 tril from making mutual investments among their affiliates as well as providing debt guarantees for the affiliates. With corporate investment showing little sign of improvement, there is growing debate in the political circle whether to abolish or ease restrictions on equity holdings by conglomerates in other companies. Market-friendly lawmakers insist the investment ceiling must be lifted to help improve corporate investment and accelerate a recovery in economy, while reformists argue the restrictions must be maintained to enhance corporate governance and secure market transparency, saying any easing of regulations will lead to reckless expansion by Korea\\\'s powerful family-controlled chaebols.

DymlerChrisler has sold its 10.5% stake in Hyundai Motor for about $900 mil more than double the value it procured in 2000, disconnecting the tie between 2 companies.
GE Consumer Finance, a unit of GE Capital Corp, will buy an equity stake and bonds in Hyundai Capital Services for KW 1 tril as part of its plan to make in roads into Korea\\\'s potentially lucrative auto financing market.
Daum Communications has acquired Lycos Inc, offering KW111.2 bil to buy the remaining assets from Spain\\\'s Terra Networks SA.
Seoul Securities, controlled by George Soros, made it clear to acquire SK Securities under MOU agreed with SK Network.

SK Corp started the production of gas in the Camisia Gas Field in Peru, which is estimated to reserve 8.7 tril cft. SK has 17.6% stake in production and 11.19% in transportation. SK, thus, holds 9 oil fields including Elephant Oil Field in Lybia. In addition, SK Corp won the bidding for the offshore exploration and development in the east sea of Brazil. SK\\\'s K Power signed the contract for Indinesian Tangguh project to import 600,000 tons of gas annually for 20 years from 2006. The gas will be used as the fuel for Kwangyang LNG Power Plant.
KOGAS distributed invitation to 11 projects in 9 countries for the bidding of the supply of gas from 2008, since most of supply contracts have been terminated.
Korean government is to invest $340 mil by 2010 to develop and own stakes in mines overseas including Peru, Philippines, Mongolia and Indonesia to secure raw materials, focusing on the development of coal, copper, zinc, iron ore, uranium and rare earths.

Hynix Semiconductor won approval from its creditors to build two chip plants in China. Creditors approved plans for Hynix to jointly build the semiconductor plants with Europe\\\'s STMicroelectronics NV, each spending $500 mil on the plants and borrowing a combined $1 bil from China. The $2 bil project is expected to pave the way for Hynix to get out of its financial troubles and normalize operations.

Shanghai Automotive Industry Corp, in the process of taking over Ssangyong Motor began conducting due diligence on the company, aiming completion by Sept 3.
GM Daewoo may lose its brand name in Europe, as the parent GMC considers selling the Daewoo cars with Chevrolet nameplate in the region.
Daewoo Contruction won the contract for the Nigeria LNG Gas Pipeline EPC project for $111.2 bil.

MONETARY AND ECONOMIC INDICES

KOSPI started month at 719 the lowest point this year, climbing swiftly upto 830, to end the month at 803. Foreign ownership, traded on the main bourse, edged up for the second consecutive month, holding 43.9% of total trading stocks as of end July, up 0.3% from June.
The exchange rate of KWon against USDollar started the month at 1165 but kept in the box of 1150s throughout the month. Foreign exchange reserves, the fourth biggest in the world, rose $2.5 bil from July to reach $170.5 bil as of end Aug on 16 consecutive monthly increase.
Korea\\\'s inflation rate in Aug reached 4.8% on year, the highest in 37 months, breaking 4.0% barrier in 16 months, fueling concerns of stagflation. Korean producer price rose in July at its fastest pace in more than 5 years to 7% on year from 6.8% in June, as the hottest summer in a decade reduced vegetable supplies and increases in bus and air fares prompted service costs to rise. Yield on 3 years corporate bonds has been lowered from 4.65% to 4.11% following BOK\\\'s announcement to lower its call rate. Korea\\\'s unemployment rate rose for the first time in 5 years, reaching 3.5% from 3.2% in June.

SHIPBUILDING AND SHIPPING

Korean Navy selected HHI as a final bidder to build a destroyer, which marks the first ship out of three vessels developed under a program named KDX-III for the delivery of end 2008. The 7,000 ton vessel is equipped with long and mid-range vessel-to-air missiles, ship-to-ship missiles and torpedoes, and it could also accommodate two mid-sized helicopters against possible neighbor’s threats at sea. DSME immediately raise administrative litigation, claiming that its price was the lowest and its experience of similar ships is neglected in the evaluation. Navy said DSME\\\'s price is too low to get proper appreciation.
POSCO plans to increase production of shipbuilding plates by 15% to 3.8 mil tons by 2008, to raise Korea\\\'s self-sufficiency for steel plates to 85% from 70%. Japanese steel mills will raise shipbuilding steel price by $150 to $600 per ton in 4th quarter, putting Korea yards into emergency to secure proper profitability. The price has been $280 in 1Q, $340 in 4Q in 2003, $420 in 2Q and $450 in 3Q this year. Korean steel mills will follow Japanese pricing.
Korea Development Bank decided to supports North-East-Asia No 3,4,5 fund for the construction of 3 x 6800 TEU container ship for HMM, providing KW293.0 bil.
Amid an unprecedented boom in shipbuilding industry, Korean yards are in agony as the profitability has been eaten by steel prices, which take 14-15% of total production cost, energy price hike and exchange risk. Moreover, the price of main engine has gone up to about $200 per BHP from $110-120, still with no certain availability.
The performance of Korea’s major yards in first half was inferior to expectation. HHI posted sale of KW4.3572 tril, 13.4% up on year, with operational profit of KW69.7 bil, 58.8% down and net profit of KW73.7 bil, 33.5% down on year. HMD recorded sale of KW668.1 bil, 14% up and the biggest in its history, with operational profit of KW80.0 bil, tripled, and net profit of KW39.0 bil, quadruple on year. DSME achieved KW2.31 tril up 14%, KW153.7 bil down 18%, KW191.6 bil up 20.2% on year. SHI KW1.9 tril 10.3% up, KW29.3 bil 66.5% down and KW66.7 bil 23.9% down. Hanjin KW888 bil 12.5% up, KW33.4 bil 55.8% down and KW26.3 bil 13.5% down. STX KW379.2 bil KW43.2 bil up, KW22.9 bil loss vs KW35.8 profit last year and KW29.4 KW10.0 bil down.
Japanese shipbuilders finally gave up $5.5 bil worth megafloat project for Haneda Airport, returning good amount of berths for 2008 delivery to shipbuilding sector.

HHI secured the order from Arcadia for 2 x 160K tanker, CGM-CMA 4 x 5100 TEU and HMM 3 x 4700 TEU container ship. Samho got the order with EUKOR Car Carrier for 2 x 6500 PCTC, and HMD had Interorient 5 x 37K ice 1A, Cido 4+2 x MR tanker. HMD\\\'s fabrication yard in Daebul Industrial Complex near Mokpo started to supply 200 tons size steel blocks to HMD.
DSME agreed with Knutsen to build 1 x 138K LNG, Golar LNG 1 x 145.7K, and confirmed the order from KOTC for 1 x 113K tanker and 2 x 69K tanker, CP Offen 2 x 8400 TEU and Bakri 2 x 35K LPG. BOD of DSME decided to burn 1.0 mil shares to raise the stock price.
SHI secured order from MISC for 1 x 145K LNG, NYK 2 x 149K LNG, OOCL 4 x 4500 TEU container vessels. Templton Asset acquired 2.7 mil SHI\\\'s shares, expanding the stake to 11.21% from 10.03%.
STX Busan signed the contract with Clippier Group for 2 x 10.6K chem PC. ShinA got NOVOSHIP for 2 x 40K PC and Daesun Parakou 2 x 1043 TEU. Shinyoung Shipbuilding graduated from the court receivership, inviting BK Choi, ex HHI’s head of shipbuilding div, as CEO, as of Aug 20, changing its name to Daehan Shipbuilding.

HMM has been aggressively investing on the expansion of fleet. During the end of last year upto Aug this year, it ordered 8 x 6800 TEU container vessels to HHI with additional 3 units within this year, 2 x 300K VLCC to HHI and concluded to purchase 2 second hand VLCCs, showing off its best performance since its establishment. Creditors of HMM completed debt reorganization plan 4 months ahead of schedule, helping HMM\\\'s financial profile and allowing it to resume normal banking transaction under independent operation. HMM has repaid KW 319.6 bil of debts by selling securities, ships and other assets, and has offered 3 year bonds worth about KW100 bil at an interest rate of 6.7%, after being graduated from court receivership and completion of debt restructuring.
Hanjin Shipping plans to put 10 units of 6500-7500 TEU new building container ships into the market during 2005-06 and 3 more units after 2007. Hanjin posted oprational profit of KW383.5 bil and net profit of KW147.7 bil on the sale of KW3.68 tril in the first half, lowering the debt ratio to 373% from 658% in 90s..
Korea Line achieved operational profit of KW65.8 bil and net profit KW49.7 bil on sale of KW319.7 bil, in second quarter. Fearnley Fonds increased its stake in Korea Line from 5.24% to 6.3%, making the total of Norwegian friendly stake to 33.06% while the company\\\'s league secures 34.6%. The share price of Korea Line is soaring in the expection of hostile M&A, reaching KW35,000 level yearly highest, jumping KW10,000 from a month ago. It was reported that Golar LNG has doubled its profits to $22.3 mil in second quarter, thanks to a $7.3 mil profit on its 21% stake in Korea Line.
Pan Ocean posted the sale of KW1.31 tril, with operational profit of KW223 bil in fist half. NYK gave up the bidding to buy Pan Ocean, and remaining 7 contenders completed due diligence.