Industrial Restructuring
The government’s specific restructuring plan by industry has been revealed on Dec. 30. When shipping companies lower the debt rates below 400 percent, they will be able to use “shipping funds” worth 1.4 trillion won (US$1.2 billion). It also encourages the petrochemical and steel industries to reduce their production facilities by 30 percent and 40 percent, respectively. If companies keep passing the buck and refusing to reduce, the government will step in. This is actually the ultimatum.
The most notable part is the creation of shipping funds worth 1.4 trillion won (US$1.2 billion). Since they are only available to companies with less than a 400 percent debt ratio, it induces shipping companies to voluntarily reduce their debt rates. As of the end of third quarter, the debt rates of Hanjin Shipping Co. and Hyundai Merchant Marine Co., the big two shipping companies in Korea, stood at 687 percent and 980 percent, respectively. The overall average also increased from 247 percent in 2010 to 378 percent in 2014. The government is planning to expand the size of the funds according to usage results in the future.
The method is Bare Boat Charter (BBC), which is preferred by shipping companies. The funds provide the right to operate new ships to shipping companies, and the shipping companies pay fees to the funds with proceeds from the operation. With the program, the shipping companies can use new ships without the burden of expenses and don’t have to take the sales risks after the operation period since the ownership of the ships belong to the funds.
Financing for the funds will be raised through joint private and public cooperation. General financial institutions will cover 50 percent, while policy financial institutions, including the Korea Development Bank and the Export-Import Bank of Korea will cover 40 percent with shipping companies providing 10 percent. For guarantees, Korea Trade Insurance Corporation (K-sure) will be in charge of prior orders and Korea Maritime Guarantee Insurance in back orders. Kim Yong-beom, secretary general at the Financial Services Commission, said, “Domestic shipping companies cannot address liquidity problems with short-term support. Since the government provides full support to operate funds, companies also should make every effort to improve their financial structure.” In addition, the government will establish “Korea Shipping Exchange,” just like the New York Maritime Exchange in the U.S. and Shanghai Shipping Exchange in China, in a bid to deal with rapidly changing shipping market conditions.
The restructuring plan for the petrochemical and steel sectors, which are suffering from the oversupply in China, is more concrete. It has suggested voluntary reduction targets. The petrochemicals sector, which is suffering from low oil prices, China’s increasing self-sufficiency, and slowing demand. Therefore, the government plans to encourage companies to reduce their facilities to produce terephthalic acid (TPA), a raw material of PET bottles, by 30 percent, or 1.5 million tons. The accumulative deficits of domestic TPA producers from 2012 to November 2015 amounted to 845 billion won (US$720.38 million). However, the government believes that the sales performance in the synthetic resin and rubber and basic petrochemical and middle fuel sectors will improve after 2017.
In the steel sector, which has had the oversupply issues for years, the government will take steps on ferro alloys. It has closed down 110,000 tons of facilities up to now, and it will also reduce 40 percent, or 400,000 tons, additionally in the future. The steel industry posted 64.5 billion won (US$54.99 million) in total in operating losses as of third quarter this year.
In addition, the government will set up a “Profitability Evaluation Organization for Order-made Industries” in the shipping industry. It will require profitability evaluations by specialized agencies before policy financial institutions provide financial support to large-scale shipbuilding projects. In the construction industry, the government will create “Korea Infra Fund” worth US$2 billion (2.35 trillion won) in order to thin out insolvent companies and support sound companies by studying the real condition of insolvent companies and introducing the early warning system. The Korea Investment Corporation (KIC) will raise funds by helping with expansion into the global infrastructure market.