Expectations are on the rise despite ongoing economic recession
It has been projected that the global economy will be able to make a rebound from the latter half of 2013, with the new governments of Korea, China and the United States expected to come up with simulation measures. At the same time, uncertainties in global stock markets are likely to go away down the road, reviving investment sentiment around the world.
Nevertheless, the picture is not entirely rosy. The Korea Chamber of Commerce & Industry (KCCI) recently published a report on the industrial outlook for the year, saying that the IT sector was the only area that achieved the highest rating among the 10 industrial sectors surveyed. However, none of the 10 received the lowest rating, implying that the majority of companies in the country are expecting to see the current economic downturn come to an end this year.
“Expert’ consensus is that the international economy will begin to make a turnaround in the second half of 2013 owing in part to expectations for these new administrations,” said KCCI Managing Director Park Jong-gap, adding, “I’d like to ask the government to provide full support for companies’ efforts to tide over the crisis by boosting the domestic economy and export side alike.”
Korea Ratings Corporation’s future economic outlook is not so bright, either. “Things don’t look good across all industries and companies, like they did the previous year, and some are likely to have a tough time during the course of 2013,” it said. What follows is the Korea Ratings Corporation’s business outlook for 2013 by industry.
Construction Sector | Research Analyst Sun Young-gui
Although investment showed some signs of recovery in the construction segment, that in civil engineering continued declining last year to prolong the recession. However, some major builders succeeded in offsetting their slump in the domestic market by means of overseas construction projects.
In 2012, the housing markets of non-metropolitan regions made little improvement to hinder the growth of the private construction sector, while the number of new orders in the public sector decreased due to the SOC budget cut and restrictions on new construction projects. Furthermore, overall investment in the sector dropped despite a slight increase in the construction segment. Meanwhile, overseas markets such as the Middle East are in a boom these days, led mainly by plant construction, unlike that of Korea which has been undergoing years of recession. Many local builders are trying to increase their overseas business ratios under these circumstances.
What is worrisome is that competition in the overseas markets is likely to heat up down the road, jeopardizing their profitability, with the metropolitan housing market failing to beat the slump and the public civil engineering sector having returned to the pre-crisis level. The government’s SOC budget for 2013 increased 3.6% from a year earlier to 23.9 trillion, but taking inflation into account, the actual amount is similar to that before the global financial crisis of 2008. Besides, the portion for new construction projects is even smaller as the government is intending to focus on those that can be completed before the end of this year. Local governments and state-run enterprises, on their part, are feeling pressure due to the huge number of orders they placed in 2009, and finding little room for new investment.
Regional housing markets’ recovery is expected to slow down as the number of unsold apartments has been on the rise since the latter half of 2012, with that of the metropolitan area also remaining high. Therefore, it may be right to say that the private real estate market won’t see a turnaround in the near future.
In contrast, overseas construction has set a new record each year since 2008 in terms of the number of new contracts, and those projects are being reflected to builders’ business showings one after another nowadays. The international oil price has topped US$100 per barrel in spite of the global economic downturn, meaning the economic stagnation will have a limited effect at best on their overseas operations. They would be well advised to prepare for some decrease in profitability, though, as more and more construction companies in Korea are trying to find opportunities overseas instead of the domestic market which remains in the doldrums.
Display Sector | Research Analyst Lee Ji-woong
In 2012, demand fell short of expectations to slow down growth of the entire display industry, although it had been expected at the beginning of the year to make significant strides thanks to the base effect of the previous year, the 2012 London Olympics, and the release of new IT products and high-end TVs. As LCD TV sets are in the stage of popularization in many countries, new products are failing to result in the creation of new demands like they had in the past during the replacement of CRT TVs with LCD TVs. Nonetheless, sluggish demand in the global TV market is likely to have been more than offset by the explosive growth of its smartphone and tablet PC counterparts and the high demand for and stable supply of display panels to the laptop industry. All in all, the display market is considered to have achieved some positive growth in 2012.
Demand and supply situations are forecast to change for the better this year and the gap between market leaders and followers is likely to widen. Demand for large-size LCD panels for TVs and monitors is expected to remain stagnant, whereas those of high performance for smartphones and tablet PCs will lead demand growth during the course of 2013. Leading display panel manufacturers are concentrating their investment on the conversion of existing TFT-LCD production lines into those of higher added value rather than building new production lines. Late comers, meanwhile, are refraining from new investment because of relatively poor performance and financial instability.
Both Samsung Display and LG Display are planning to turn part of their existing production lines into those for new technologies and products, such as low-temperature polysilicon (LTPS), oxide and OLED TV, which will lead to a higher ratio of high value added products and improved profitability. Conversion to the oxide and LTPS processes is estimated to reduce production capacity by 40% and 60%- 70%, respectively, decreasing overall supply in the industry. The production yield decrease is expected to add to the capacity loss, with the annual display panel supply forecast to increase little compared to the previous year. The supply decline will have a positive effect on demand and supply situations despite uncertain demand forecasts.
Korean display panel manufacturers are providing more and more specialty products with better track records. They are poised to pull further ahead of their competitors thanks to favorable market conditions and technological superiority.
Semiconductor Industry | Research Analyst Lee Ji-woong
Many people anticipated that the semiconductor industry would make a rebound in 2012, but they were proven wrong. The DRAM segment had to go through a severe recession, eclipsing the rapid growth of NAND flash, and has continued to shrink the entire market for two years in a row.
The memory semiconductor market is greatly influenced by shipments and prices like most manufacturing segments. Last year, both the rate of supply growth and the average selling price showed a downward trend, putting a brake on market expansion. Furthermore, memory chip manufacturers refrained from making new investments due to the double whammy, meaning that some adjustment on the supply side began from the latter half. Technological disparity between market leaders and followers, though, became more conspicuous, providing a silver lining to the former.
No explosive growth on the demand side seems to be on the horizon, but the supply adjustment is expected to result in somewhat better conditions with the restructuring of the industry having been almost completed. As the current economic recession lingers on, new IT devices are leading to less and less demand creation these days. The DRAM demand growth rate has dropped as consumers are changing their PCs less frequently and tablet PCs are encroaching upon the traditional PC market. However, NAND flash demand is projected to show some solid growth as an increasing number of portable devices adopt NAND flash memories.
Despite uncertainties on the demand side, less fierce competition among suppliers and supply volume adjustment will lead to more favorable demand and supply conditions. Unlike in the mid and late 2000s, when aggressive facility investment and a microfabrication race resulted in huge capital expenditures, memory chip makers are now rather conservative when it comes to capital investment, owing to years of supply glut and profitability decrease, as well as technological limitations following the development of microfabrication processes. Furthermore, many are avoiding excessive competition amid the reshaping of the market which is revolving around leading players.
For example, Korean semiconductor manufacturers that are dominating the global market are rarely planning for new investment or plant construction due to excess supply. The pace of microfabrication process refinement is slowing down along with the supply increase based on microfabrication. Instead, companies are focusing more on the improvement of production and process efficiency through repair and maintenance.
Petrochemical Industry | Research Analyst Song Jong-hyu
The global petrochemical industry, which began to decline in the second quarter of 2011, remained in recession throughout 2012. The story was not so different for China and other Asian markets.
The recession in the sector can be attributed mainly to sluggish demand caused by the financial crises in the eurozone and the US. This turmoil has led emerging economies to tighten their purse strings, which, in turn has resulted in a demand reduction in the overall petrochemical sector. In China, the stagnation has been more conspicuous compounded by the aftereffect of its large-scale economic stimulation program. Both exports and investment have fallen, dragging down the economic growth rate along with demand for petrochemical goods, and this has delivered a staggering blow to Korean petrochemical companies highly dependent on the Chinese market.
The trend is likely to continue in 2013 despite major nations’ pump-priming efforts yielding visible results. This is because concerns over the eurozone are still around, supply is forecast to rise due to facility expansion in China and the Middle East, and there being no sign of significant growth in demand in Asia.
Even so, some positive estimates emerged at the beginning of this year. China’s purchasing managers’ index (PMI), one of the most frequently quoted leading indicators, has been found to be over 50 for three consecutive months leading to December 2012, while the country’s GDP growth rate for Q4 of the same year is estimated at 7.9%, higher than previous expectations. Adding to the positive news, China’s re-stocking demand and economic stimulation effect are making the outlook brighter, though temporarily, for the first half of this year.
Still, we should not forget that risks still exist. The possibility is extremely low for the time being that China’s domestic demand and an economic turnaround in major nations will coincide with each other. At the same time, Middle Eastern petrochemical companies are solidifying their presence in Asia, while the supply of naphtha substitutes such as shale gas, and China’s capacity expansion for coal-based products, are picking up speed, making things tough for Korean petrochemical firms. With the situation as it is, they are unlikely to boost profitability or mark up their products for some meaningful improvement in terms of margin, though it may differ depending on business portfolio and structure. Furthermore, they should not overlook such negative factors as the strong won trend and petroleum price volatility.
Industrial Outlook for Automobiles – By Researcher Lee Seung-ku
The global automobile market showed a wide gap in performance by region and company in 2012. In the domestic market, while Korean companies were in a slump recording a 4.3% decrease in sales on a year-on-year basis, foreign companies sold 130,000 cars, a 24.6% increase from last year, and surpassing the 10% mark in their combined market share. In overseas markets, sales in Europe, the epicenter of the recent fiscal quake, fell 8% year-on-year. However, car makers enjoyed a bullish market in the US and Japan, while emerging markets including China maintained their upward sales trend. Japanese makers seemed to come out of the setback in production caused by strong earthquakes in the nation’s northeastern part, showing big improvement in sales and financial performance. Germany’s Volkswagen and BMW made growth thanks to their successful market diversification. However, Fiat, PSA and Renault suffered sluggish sales due to their biased dependence on the European market. Korea’s Hyundai and Kia, despite the resurrection of their Japanese competitors, 3rd-quarter domestic underproduction caused by labor strikes, and 4th-quarter fuel efficiency-related mistakes in the US, showed a good performance with 7.12 million cars in sales, surpassing their combined annual sales target of 7 million cars.
In the meantime, the business environment is a little pessimistic this year compared to last year. Major research institutes predict the global automobile market in 2013 will show more sluggish growth than in 2012 and that competition among the companies will become fiercer as t they actively expand into overseas markets, particularly emerging markets with high-growth potential, rather than domestic markets. From Korean companies’ perspective, chances are that they will be burdened with increasing demand for social responsibilities, stronger checks and supervision, and rising labor costs. In particular, having grown as global makers, Hyundai and Kia are likely to feel repressed. Considering Korean car makers’ high proportion of exports, they will likely have difficulties from the appreciation of the won, which is apparently proceeding from the end of 2012. Their major competitors in Japan will likely take advantage of the weaker yen, no doubt another unfavorable factor for Korean makers. In regards to how badly these unfavorable factors will influence their performance, constant monitoring is required. They also need to be cautious with their financial structure-related indexes and cash liquidity in order to prepare themselves for unexpected negative situations.
Industrial Outlook for Shipbuilding – By Researcher Kim Bong-kyun
Shipbuilders appeared to falter in 2012 as the bearish market fell even deeper. They started 2012 with expectations of recovery after two consecutive global financial and fiscal crises in 2008 and in 2011, yet there were only a small number of new orders and no price rebound.
According to Clarkson, as of the end of November 2012, the total amount of new orders totaled 18.8 million CGT, down approximately 50% year-on-year, while the outstanding balance of orders was 93.3 million CGT, falling below the 100 million CGT level for the first time in seven years. Clarkson’s new building price index approached 190p in 2008, yet had plunged to 125.9p as of the end of November 2012, showing a serious slowdown in the new building market. 125.9p is the lowest record following 124p in February 2004.
As the sluggish market continues, Korean shipbuilders are suffering from a double whammy of deteriorated profitability and insufficient working capital. The main reason for the fall in profitability is because the time has come to start delivering so-called malicious inventories for which they received orders just after the global financial crisis. The so-called “higher top and lower bottom” pattern in shipbuilders’ profitability appeared when low-margin ships began to be delivered in 2011. This pattern became worse in 2012. Particularly in the second half of 2012, the downward trend moved more steeply. However, what is more serious is the lack of working capital. As poor performance in winning new orders continues, shipbuilders are struggling more with insufficient working capital. The recently prevailing payment type “Heavy Tail” is making things even worse. Recently, its negative influence has been expanding with a reduction in advanced payments.
Recovery doesn’t look easy in 2013. This is because outlooks for marine transportation, which is the forward industry for shipbuilding, are still bad due to the delayed economic recovery and accelerated overload trend. Furthermore, the ship finance market remains in a stalemate. The ship finance market has reentered the credit crunch at a fast pace since the European fiscal crisis broke out. The on-going downward trend in ship prices has put financial burden on ship owners, while traditional ship finance powers in Europe have suffered from liquidity problems. This situation is making it more difficult for ship owners to get finance.
In the meantime, the shipbuilding market is proceeding with fast restructuring toward marine construction as oil prices remain at a high level. A bigger gap is expected between Big 3 who have the capacity for marine construction and the non-Big 3 who don’t. Marine construction accounted for 12.1% (US$ 13.8 billion) of the entire shipbuilding market in 2005, yet this increased to 24.5% (US$ 26.6 billion) in 2010, 41.0% (US$ 42 billion) in 2011, and approximately 60% (US$ 32.5 billion) as of the 3rd quarter of 2012, the first time is has passed the 50% mark
Industrial Outlook for Steel – By Researcher Kim Byung-kyun
The steel industry shrank in size and profitability along with the general economic slowdown in 2012. Sales were sluggish as the European fiscal crisis continued, China’s economic growth slowed down, and general economic conditions in and out of the country remained depressed. Due to the decrease in demand, it was inevitable that production of major items such as steel plates and cold-rolled steel sheets would be reduced. Major players’ sales and earnings fell because of the poor market situation and drop in prices.
It is projected that the oversupply trend will be fixed in 2013 as demand is unlikely to recover in the near future and the extended production lines of some items will increase supply. Therefore, the market will slow down in 2013 as it did in 2012. Accordingly, the performances of major steel makers in 2013 will be at a similar level to that of 2012. In regards to demand, demand for steel materials is naturally linked to general economic growth. The IMF predicts that the global economy will grow 3.6% in 2013, similar to the previous year (3.3%), while the World Steel Association estimates global demand for steel materials in 2013 will increase 3.2%, higher than in 2012 (2.1%). However, considering that the European fiscal crisis still continues and the main street economy will suffer in the aftermath of the crisis, it cannot be ruled out that actual figures will be lower than predicted.
It is predicted that China, accounting for a significant portion of global demand and having the largest external influence on the Korean market, will see economic growth (estimated at 8.2%) and an increase in the consumption of steel materials (3.1%). However, these growth rates are low compared to the average since 2000. In the case of Korea, the IMF predicts that the general economy will grow 3.6% in 2013, a little higher than in 2012. Therefore, it is sensible to expect some sort of increase in demand for steel materials. However, considering the market situations of industries such as automobiles, shipbuilding and construction, it is difficult to expect any meaningful recovery in domestic demand.
Meanwhile, there are many variables on the supply side. After Hyundai Steel completes construction of its Dangjin Works’ Blast Furnace 3 in September 2013, the company will be able to churn out 4 million tons of crude steel, 2 million tons of hot-rolled plates, and 2 million tons of steel plates annually. Therefore, from a wider perspective, while demand has not recovered yet, later process items such as cold-rolled sheets and steel pipes and upper process items like hot-rolled steel will be firmly oversupplied, with steel plates also likely to become oversupplied. In general, such an oversupply problem is likely to become more serious. The Chinese market also has a meaningful influence on domestic supply. The key issue is whether excessive demand and supply will continue or not. In 2005, the Chinese government began to proceed with the restructuring of the steel industry in order to effectively control output and enhance industrial concentration. However, due to the economic recession since 2008, the Chinese government has had to focus on sustainable economic growth from a political and economic aspect rather than the restructuring of individual industries. As a result, it failed to push forward with restructuring the steel industry.
According to the government’s 12th 5-year plan, the Chinese steel industry is being restructured once again. As the number of obsolete facilities increases, the oversupply problem might be gradually solved. With its inventory surplus decreased, China will have a smaller exporting capacity than before. However, considering the on-going European fiscal crisis and a possible economic slowdown in China, it is uncertain whether the oversupply problem will be solved quick enough to have a positive impact on the Korean and Chinese markets.