Reversal of Fortune for Korean Process Industries as China Swings into Exports

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Researched by Industrial Info Resources (Sugar Land, Texas). Grand national industrial and energy strategies do not always develop in the seamless way that government planners originally envisaged in increasingly competitive globalized markets. If the execution of Model Plan A begins to stutter in the face of the unpredictable, or a competitor’s own Plan A, then there had better be a Plan B and a Plan C with closer tactical horizons to re-direct Model Plan A and meet the threat. South Korea is currently going through a period of soul and model searching as process-based industries targeted toward China’s markets feel the heat from that country’s rapidly expanding process capacities and product exports from a low cost base.

Earlier in 2006, the South Korean Finance and Economy Minister Han Duck-soo said that Chinese industries were rapidly enhancing their competitiveness by attracting large-scale foreign direct investment, supported by the policy priority on science and technology, thereby reducing the Korea-China trade gap. He said that it was essential for his country to achieve industry upgrading and bolster international competitiveness by increasing investment into research and development and by developing human resources. He also suggested advancing Korea’s service industries to create a synergy with Korea’s strong manufacturing capacity to prepare for a drop in import demand from China.

The turnaround in Korea’s market fortunes is being caused by the fact that the competition in large-scale process industries is able to catch up as soon as a certain amount of capital and facilities are in place. After a positive three or four years of growth, driven by Chinese demand, the petrochem industry is approaching a fight for survival by 2008 as Chinese products have pushed into Korean markets. Currently, Korea’s petrochemical industry exports 50% of production and this trade is now under threat from the Middle East as well as China.

In 2006, companies like LG Chem (Seoul, South Korea), Honam Petrochemical (Seoul) and Hanwha Chemical (Seoul) saw operating profits and net income drop. Rising feedstock prices coupled with the inability to raise prices as Chinese competitors produced on a massive scale. The global dimension of the problem for Korea is accentuated by the fact that firms backed by foreign investment from oil, energy and chemical majors are boosting Chinese production.

The dramatic swing to exports in China’s steel industry has had a marked effect on Korea’s export figures over a year-on-year period to the end of October. The Korean Iron & Steel Association reports that imports from China increase 46.4% to 8.44 million tons in the period and Korean exports to China decreased by 14.4% to 3.4 million tons. Chinese imports have risen over 500% since 2003 when they totaled 1.82 million tons. Imports from China are expected to hit 10 million tons by the end of this year. The increased volume of imports is not the only thing that has grabbed the attention of local steelmakers, the quality has moved from low-end steel reinforcements, rods and section shaped steel to hot and cold rolled steel plate and galvanized sheets. Hot rolled steel plate imports for the shipbuilding and construction industries rose 118.3 % to 1.41 million tons by the end of October. Cold rolled steel plate imports rose 44.7% to 140,000 tons for the period.

The squeeze now being exerted on process-based industries is being directed to existing merger and takeover legislation, which hinders the integration of companies in the pressured sectors where supply and production chain ownership would enable significant reduction in production costs to be made. Currently, no three companies can exceed 75% market share in a sector and the Fair Trade Commission has enforced the rule against a number of potential rationalization moves.

There is no secret about the imminent crisis and its scale among government, industrialists and industry observers. Korean pride and technological ingenuity are seen to be on the line. Industrial Info wondered some months ago whether the frantic developers of major Asian petrochem plants knew something about oil and feedstock reserves that the rest of the world had missed. Korea continues to amass energy supplies and security. Other Asian states, with strategies of becoming regional energy and petrochem hubs, must be watching developments in the Sino-Korean market relationship with bated breath.

Industrial Info Resources (IIR) is a Marketing Information Service company that has been doing business for over 23 years. IIR is respected as the leader in providing comprehensive market intelligence pertaining to the industrial processing, heavy manufacturing, and energy-related industries throughout the world.