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Korea Report - September 2004

Author : Hwang & Co Date : 04-10-14 10:08 Hit : 40943

Topics.

-IAEA had second probe of Korea’s state run nuclear research facilities.
-President insisted to abolish National Security Law.
-Korean troops moved into Irbil Iraq.
-Experts substantially lowered the economic growth forecast in 2004 and 2005.
-Korea’s consumer confidence fell to a 44 month low in Aug.
-Energy related companies try hard to secure energy resources abroad.
-Korean yards expect lowered profit margin, while ship’s price goes higher.
-STX was chosen as preferred bidder to take over Pan Ocean Shipping.
-KOGAS plans to establish a LNG transportation company.

GOVERNMENT AND POLICY

A team of inspectors from UN‘s nuclear watchdog, International Atomic Energy Agency, had another field probe of the state-run nuclear research facilities where unauthorized experiments were conducted with traces of plutonium in 1982 and a uranium enrichment test in 2000, following up its initial inspection during Aug 31-Sept 5. Government admitted that scientists conducted experiments and produced 0.2 gram of uranium with a strong innate curiosity to find how things work, dening any intention to build a nuclear bomb but agreeing that the experiment \"should have been reported years ago.\"
The experiment was front-page news in Japan, who is reported to have tons of plutonium, while Japanese government has accepted Seoul’s explanation. NK responded to the experiments by warning of a \"nuclear arms race in Northeast Asia”.

President Roh Moo-hyun insisted the National Security Law must be scrapped, describing the anti-communist law as an old legacy of Korea‘s past military dictatorship used to suppress dissenters and abuse human rights, deepening the political and public conflict over the fate of the controversial draconian measure. About 1400 veterans covering various strata of society declared state of emergency concerning about the identity of the nation in connection with the government\'s attempt to abolish of the NSL.

President Roh Moo-hyun made a state visit to Russia and Kazakhstan, focusing his summit diplomacy on acquiring energy resources for Korea, the worlds fourth largest energy buyer. Korea and Kazakhstan agreed to join hands in developing petroleum and uranium in Kazakhstan, offering Korea inroads to energy exploration in the resource-abundant Caspian Sea region. President Roh and Russian President Putin agreed that 2 countries will upgrade bilateral ties to pursue comprehensive cooperation in various areas, including energy and science technology. The two leaders adopted a joint declaration, which redefines the relationship as a “Mutually Trustful and Comprehensive Partnership\", reaffirming that the Korean Peninsula should remain nuclear free, within the framework of 6 party nuclear talks to defuse tension surrounding NK\'s nuclear weapons development.

A consortium of HRH Construction Corp of USA, signed a MOU with state-run Korea Land Corp to invest $3 bil in Korea\'s 3 free economic zones in Incheon, Busan and Gwangyang. The consortium includes Trump Hotels and Caino Resorts, Tishman Speyer Properties, and Marriott International.
The Busan authority signed a MOU with Singapore to induce investment from Singapore into the free economic zone encompassing Busan City. The partnership is expected to provide a platform to speed up investment by Singaporean logistics and manufacturing companies to the 25,000 acres of land, stretching from Busan to its neighboring Jinhae City.

SKorea has one of the lowest birthrates in the world with 1.41 over the period of 2000-2005, below the average in industrialized countries, concerning about a dramatic aging of its population in the decades ahead. The number of suicides reached a record high in 2003 to become the fifth largest cause of death in Korea. Korea ranked fourth in the 2004 OECD Health Data on the number of suicides, following Hungary, Japan and Finland.
Korea\'s per capita tax burden is expected to reach a record of KW3.43 mil in 2005, up 7.7% from the KW3.18 mil this year, as the nation\'s population growth fails to catch up with the increase in state spending.
Korean movie director, Kim Ki-duk, won the best director prize at the Venice Film Festival for his film \"Empty House. It came after he took the same award at the Berlin Film Festival in February.
Former Czech Republic President Vaclav Havel was named as the winner of the Seoul Peace Prize for his efforts to promote democracy at home and help the less privileged around the world. The Prize, established in 1990, commemorates the successful achievement of the 1988 Seoul Olympic Games with the annual prize of $200.
National Statistic Office announced Korea\'s standing in the world as follows; ranked No1 in Shipbuilding and sale of DRAM semi conductor, 3rd in crude oil import, 4th in whisky import, 4th in forex reserve, 6th in inflation, 11th in GDP, 12th in trade and 36th at corruption in administration.

NORTH KOREA AND NATIONAL DEFENSE

About 1,300 of Korean troops flew into Irbil from Kuwait on board aircraft while another 1,200 traveled by road in 394 tanks and military vehicles. Another 300 who arrived in the southern city of Nasiriyah as an advance unit moved to Irbil to build military barracks and security facilities. A further 900 troops now in Korea will be sent to Irbil in Nov or later, depending on the needs in Iraq.
President Bush called Korea \'Valued Democratic Ally\' in his speech of accepting presidential nomination, while he named Japan \'Key Ally‘. His Security Adviser Rice appologized for President to drop the name of Korea from the list of allies who dispatched troops to Iraq.

NK declared that it has turned the plutonium from 8,000 spent nuclear fuel rods into nuclear weapons to serve as deterrent against US nuclear threats. SKorean officials reacted that it would be a part of calculated propaganda offensive, aiming to influence US Presidential election. US also responded calmly suggesting NK\'s declaration as a touch of theater.

US Congress unanimously passed the NK Human Right Act, providing $100 mil for 4 years to support the activities of NGOs to enhance the human rights of NK\'s refugees. 9 NKoreans sought asylim in US school in Shanghai, but American authority handed them over to Chinese police. 43 team of NKoreans climbed over the wall of Canadian Embassy in Beijing to seek asylum, asking to send them to SKorea. Chinese police strongly asked to hand them over to China, but Canadian embassy refused, continuing the talks with Chinese and SKorean authorities. Japan promised to deal 29 NKorean refugees who sought asylum at a Japanese school in Beijing as quietly as possible, in a bid not to sour the relationship with NK.

ECONOMY AND POLICY

While Korean government reconfirmed its prediction of economic growth this year at 5% level and made the budget of 2005 on the basis of 5% growth, the local private institutes and foreign experts significantly lowered their previous forecast on Korean economic growth in 2004 as well as 2005. LG Economic Research Institute projected economic growth in 2005 to drop to 4.1% from 5% this year. IMF led the downgraded outlook this year from its earlier 5.5% to 4.6% and from 5.3% to 4.0% in 2005. ADB lowered 4.8-4.4% this year and 5.2-3.6% in 2005. CitiGroup and Goldmansax followed with adjustment to 4% level foe 2004 1nd 2005, jointly attributing to the slowdown in export, main locomotive to lead Korean economy, and endless stagnation in domestic consumption.
Morgan Stanley warned that global economic growth may fall from 4.5% this year to 3.7% in 2005, as the speed of 2 main engines, such as Chinese suppliers and American consumers, may be slowed down.

The cabinet approved next years consolidated state budget of KW208 tril up 6.3% on year, making 2005 as the first year for the budget to surpass KW200 tril. With one month to go in the 2004 federal budget year, government reported a deficit of $436.9 bil thus far, 9% larger on year. The budget deficit seems to fall gradually over the next 5 years after reaching 0.9% of the nations GDP this year, expecting to balance budget by 2008.

The amount of export in Sept reentered into $20 bil level, achieving $21.02 bil, up 23.5% on year, marking trade surplus of $2.82 bil. Korea\'s trade deficit with Japan swelled to $16.7 bil during Jan-Aug period this year up 32.1% on year, with imports of $30 bil.
Korea’s consumer confidence fell to a 44-month low in August to 87.0 from 89.6 in July, as the evidence that domestic demand will remain a big drag on Asia\'s third largest economy.

Government sold a 5.7% stake in Woori Financial Group for $282 mil, kick starting a much delayed privatization in a sign of renewed investor confidence in the local banks.
Woori Financial Group, the country\'s third largest financial group, is to buy a 21.1% stake in LG Investment & Securities, Korea\'s No.2 brokerage, for some KW297.6 bil, in a bid to merge the company within this year to create the nations top brokerage.
33 foreign bank branches piled up tidy profits in the first half this year, recording net profit of KW318.9 bil on KW91.4 tril assets mainly from their corporate lending, compared KW244.9 bil on KW66.05 tril in first half of 2003. The success encouraged them to pursue aggressive target to the retail bank market, challenging domestic banks\' domain.

CHAEBOL

The amount of liquid assets held by local conglomerates has jumped, refraining from local investment as an indication of uncertainties in Korean economy. Top 10 conglomerates held KW27.1 tril in liquid assets as of end June, marking a 53.2% increase on year.

While WTI crude oil price surpassed $50 per barrel to $50.20 early Sept 29th for the first time in history, all Korean energy related companies are accelerating their efforts to secure energy resources abroad. SK Corp, Korea\'s largest oil refiner, with Devon Energy Corp found layers containing oil in a field, known as BM-C-8 block off Brazil. SK Corp and Marathon Oil have discovered gas in a field off Equatorial Guniea. SK Corp has now stakes in 17 oil and gas development projects in 11 countries. LG Caltex is to invest $18 mil this year to offshore oil field in Cambodia, and Daesung Ind pursues Siberia gas pipeline project and oil exploration in Caspian Sea. Daewoo Int found huge gas in its gas field in Miyanmar. Hyundai Corp starts to collect the income from its investment to Oman LNG and Yemen Malib oil project. Government has also been successful to secure the rights to explore oil field equivalent to 2.5 bil barrel in Russia and Kazakhstan.

Samsung Electronics released a new 2.5-gigabyte memory chip for third-generation mobile phones with the highest capacity. SEC decided to acquire 4 mil own shares from the market by Dec to improve its share value. LG Electronics unveiled the world largest liquid-crystal-display digital television with a size of 55 inches. LG Chem plans to more than double its capacity to produce petrochemical materials in China by 2008.

Hyundai Construction, Hanjin Heavy Ind, LG Construction, and 317 other construction companies won orders worth $4.14 bil from 35 countries as of the end Aug, surpassing last years total of $3.67 bil and represents a 74% surge on year.
Doosan Heavy Ind won the contract worth $410 mil to construct Desalination plant for Sohar Power Generation complex in Oman.

POSCO bought a 14.9% stake in Australian coal mine, CAML, securing 1 mil tons of fire coal annually, and also acquired 8.94% stake in a coal mine in Queensland Australia for A$19 mil, securing another 1 mil tons supply of coal a year.
POSCO plans to construct a steel mill of 3 mil tons capacity in Orrissa India investing $8.0 bil, as the biggest foreigner\'s investment in india. It will be expanded to 10 mil tons capacity in 5 years. Following Indian project, POSCO signed a MOU with CVRD, Brazilian ore mining company to start a feasibility study to construct a steel mill in Brazil.
Share prices of POSCO keep changing record highs and analysts forecast that strong global steel demand continuing into next year should promise more gains.
Korea Electric Power considers building a gas-fired power plant in Indonesia\'s western Java, using LNG from a $300 mil LNG receiving terminal nearby to be built by PT Perusahaan Listrik Negara, Indonesias state power utility.

Hyundai Motor (HMC) signed MOU with Chinese authority to build a commercial vehicle manufacturing factory in China by investing $780 mil by 2010. HMC plans to build its second passenger car plant in China, with the output of 300,000 units of minicars and other models per year by 2007, spending $600 mil on the project.
Hynix Semiconductors engaged in accounting frauds during 1996-1999 that total nearly KW2 tril. The financial authority said that, despite the distortion of accounts, Hynix later corrected the accounts in phases over the next 3 years, and there is no controversial accounting item existing now. Hynix will be fined KW2 bil for the fraudulent accounting practices.

GM Daewoo is to sell its sedans in Europe using the Chevrolet badge from the beginning 2005, vanishing the brand under the name of Daewoo.
Daewoo Heavy Ind received orders valued $51 mil from an international trade exhibition in Chicago, expecting machinery exports this year to rise 46% on year to $320 mil. Government is to sell its stake in Daewoo Engineering & Construction, by the first half of 2005.

MONETARY AND ECONOMIC INDICES

Korea\'s stock price index started the month at 820 and fluctuated in the box of 815-857 to end at 835. The exchange rate of KWon has reached once 5 month low at 1144 to USD, but return to 1152 at the end of the month.
Korea\'s foreign exchange reserves hit the new high of $174.5 bil at end Sept, up $4 bil on month, exceeding its entire overseas liabilities of $169.7 bil for the first time.
The estimated consumer price index in Sept is 4-4.2%. Korea\'s import prices jumped 16.7% on year in Aug, the sharpest rise in nearly 6 years, driven by high oil prices. The price index for raw materials and intermediate goods jumped 15.3% on year, the fourth consecutive month of double-digit rises and the largest gain since Nov 1998. The yield on 3 years corporate bond lowered in the box of 4.14- 4.02% through the month.

SHIPBUILDING AND SHIPPING

Shipbuilding price has been soaring up, reflecting material cost hike and continuously expanding volume of orders. The price of VLCC has broken the barrier of $100 mil by KOTC order to HHI for the first time in 12 years and maintained the level in the order of NSCSA to Hyundai Samho. Price of 6400 PCTC has been raised from $40m to $50 mil level, following explosive demand in car carriers. Recent STX contract for Sovcomflot shows the price of MR tanker as high as $42 mil. The profit margin of Korean shipyard is expected lowered to -1.6% in 2004 1Q, -4/1% in 2Q, -5.8% in 3Q and -7.2% in 4Q, due to the hike of material cost, despite the rapidly rising ship\'s price.
Hyundai and Samsung made a consortium to win Qatar Gas Project II, sharing 4+4 units of 200K LNG carriers in an effort to improve the price and spare proper delivery timing. DSME has separately bid same volume of order by itself.
Foreign funds have kept increasing their stake in Korean shipyards. Templeton Asset Management acquired 5.01% stake in DSME, Grantham, Mayo, Van Otterloo held 5.68% in HMD, Capital Research & Management also 5.0% stake in HMD and JF Asset Management secured 5% in HHI.

HHI confirmed the order from CMA CGM for 3+1 x 5100 TEU and received orders from BP to build 4+4 x 155K LNG carrier, Iino Kaiun for 1 x 35K LPG, Unique Shipping 2 x 35K LPG. Hyundai Samho shares 1+2 x 155K LNG out of HHI\'s order with BP, substantially entering into the LNG market. It also secured order from NSCSA of Saudi Arabia for 2 x 300K VLCC. The labor union of HHI, having kept the hardest line during 70s and 80s labor movement, was dismissed from membership of its militant umbrella union, because of its turning into cooperative policy with the company. It prepares to pursue independent line, parting from the hard liners. HMD got the orders from Cido for 4+2 x 47K PC.

DSME agreed with Wallenius to build 3 x 8000 PCTC, Leigh Hoegh 2 x 6100 PCTC, Angelicoussis 2 x 170K bulker and Bakri Nav 2 x 35K LPG carriers.
SHI secured order from Maersk Sealand for 4 x 9300 TEU, OOCL 4 x 4500 TEU container ships and Geden Lines 2 x 115K tanker.

Hanjin contracted with Maersk for 6+2 x 6500 TEU, Koenig and Schoeller 2 each x 3400 TEU container carriers. Hanjin assigned Hong Soon-ik as CEO in charge of yard management. STX confirmed the order from Sovcomflot for 4 x 47K ice 1A PC. STX Group started due diligence as a step to take over Pan Ocean Shipping, expecting some synergy effect in line with shipbuilding-shipping-energy-power generating industry.
Samho in Tongyoung had the order from Modion Maritime for 4+2 x 12.8K IMO II/III chem and Unicorn Shipping 2+2 x 12.8K tanker

HMM bought 1 x 270K VLCC from Idemitsu Tanker reportedly at $53.5 mil for the delivery in Sept, securing total 5 VLCCs in this year.
Hanjin Shipping appointed Park Jung-won as its new CEO and president, replacing Choi Won-pyo. Park has been with Hanjin since ‘72 and worked mainly in business division.
Fearnley Fonds sold 1.44% of Korea Line (KLC) shares, lowering its stake to 4.86%, and Fidelity Funds also lowered its stake from 5.67 to 4.61%. Stock market interprets such action from friendly league of Golar LNG that Golar\'s ambition to take over KLC becomes cooled down, and share price of KLC plummeted 5.46% a day. KLC issued KW20 bil scale of convertible bonds in a bid to protect itself from possible M&A attempt.
STX has been selected as preferred bidder to take over Pan Ocean Shipping, eliminating other contenders including LG-Caltex, Dongkuk Steel Mill, KLC and Zodiac Maritime, after it submitted the proposal of KW440 bil for 67% stake in Pan Ocean. It scheduled to carry out due diligence by Oct 8 and complete the acquisition by Oct 29.
KOGAS plans to establish a LNG transportation company in joint venture with Hanjin, HMM, SK Shipping and KLC, in a bid to improve international competitiveness. Golar LNG and Maersk Line expressed its interest in participation with the transportation of LNG for Korea who imports 20 mil tons a year, second biggest importer in the world after Japan.
Eukor Car Carrier, jointly owned by W Wilhelsen and Wallenius, has successfully issued a KW170 bil 5 year corporate bond, increasing the flexibility of the company with upgraded financial stability. KDB led an unprecedented bond market deal in Korean history.