Industrial Outlook for 2014

 

In 2014, the Korean economy is forecast to show a gradual recovery thanks to increasing exports, mainly led by the automobile and petrochemical sectors. However, the display industry is likely to face at least some challenges, as the global demand for, and price of, panels is on the decline.

The Ministry of Trade, Industry and Energy held this year’s first economic ministerial meeting on January 7 and announced its industrial outlook for 2014.

“The advanced economies are on a recovery track, and this will result in higher exports and production on the part of major industries such as semiconductors and automobiles,” said Jeong Dae-jin, head of the Industrial Policy Division of the ministry, adding, “Still, the pace of recovery is likely to differ in various markets, depending on policy environments.”

The shipbuilding, marine plant construction, machinery, and steel sectors are expected to have a better year in 2014. Things are predicted to be particularly favorable for machinery exporters and steelmakers, which suffered from a supply glut, weak yen, and economic recession in developed countries last year.

Under the circumstances, the government came up with generally positive forecasts, but it is also mulling over how to cope with the slumps of certain sectors. “The concerns over economic slowdowns in emerging countries and deflation in Europe, as well as uncertainties like the weak yen and tighter labor and environmental regulations are still lingering on, which means that we need to focus on investment attraction and the improvement of overall business environments,” the director said, continuing with, “We are planning to move ahead with some microeconomic measures in certain industries so as to deal with pending difficulties.”

Electrical and Electronics

Upward trends are expected for the electronics industry.The information and communications industry is expected to continue its upward trend this year. Its positive factors include the expansion of the production of high valueadded export items such as semiconductors, SSDs, and smartphones, the high LTE smartphone sales volume in emerging markets like China, and the rise in the price of semiconductor chips.

The display sector is likely to be revitalized to some extent thanks to the 2014 Brazil World Cup and the Sochi Winter Olympics. Nevertheless, a stark turnaround in terms of profitability is unlikely to be anticipated, as the global demand for high-end smartphones is in stagnation, which was recently evidenced by the Q4 2013 earnings of Samsung Electronics.

The semiconductor and consumer electronics industries are forecast to continue their growth, too. The export amount is estimated to increase by US$500 million to US$1.5 billion in the respective sectors.

Things are not entirely bright, though. One of the biggest threats is the fast growth of China. Chinese companies are rapidly increasing their share in the global smartphone, TV, and many more markets by capitalizing on their cost competitiveness. At the same time, the competition between Chinese manufacturers and Samsung Electronics is getting intense as China, which accounts for 28% of the global smartphone market, adopts LTE this year. Two of the other concerns are the drop in the average sales price of smartphones, and the consumer preferences that are changing faster than ever nowadays.

“The largest portion of the global smartphone demand is for mid-market and low-priced phones, and this signifies that things are becoming more and more advantageous for Chinese manufacturers,” Hana Institute of Finance researcher Lee Joowan explained, adding, “Cost competitiveness is highly important in that consumers are in need of more high-performance LTE handsets and mid-end ones at the same time.”

The display industry is predicted to have as harsh a year in 2014 as it did in 2013. “TV panel demand, which makes up 66% of the total LCD shipments, is in the doldrums, and the unit price will remain on a downward spiral throughout the year,” E*Trade Securities Research Analyst Jeon Byeong-ki commented. Besides, Chinese display panel manufacturers are aggressively expanding their production facilities amid strengthening trade protection measures.

Automobiles

Auto industry is looking slightly up as well.The government estimated the global automobile demand for this year at 90.34 million units, 4.8% up from last year. It also predicted that Korea’s car exports will set a new record in 2014, as not a few consumers purchase new ones, and the Korea-EU FTA reduces the tariffs.

“Korean car makers are estimated to increase their annual exports by 4.7% from last year’s US$48.7 billion,” said the ministry, continuing, “We will improve the related systems and regulations in order to facilitate the development of eco-friend ly and self-driving vehicles and components and pose less of a burden on the manufacturers through negotiations among the authorities concerned.”

The local auto industry enjoyed some positive effects from the cut in individual consumption taxes for cars with an engine displacement of 2,000 cc or higher. A variety of new models were released last year, too. However, the production and export sides were affected by the introduction of the double shift by Hyundai and Kia and the weekend strikes of its workers. The global market size is expected to be expanded along with clunker replacement demand this year.

Nonetheless, it is also true that Korean car makers are in the face of harsher conditions, that is, the domestic market is showing no signs of a lasting recession, and foreign car makers in the country are looking to move out. The labor issues including the ordinary wage and the weak yen cannot be neglected, either.

Experts are pointing out that the biggest problem is the decreasing demand for Korean cars both at home and abroad. “Korean auto manufacturers are getting more and more unsuc cessful in the domestic market due to the increasing presence of imported cars,” said Lee Hang-koo, director of the Korea Institute for Industrial Economic & Trade. He went on, “In the overseas markets, they are losing steam due to the appreciation of the Korean currency and the lack of new models.”

The industry insiders’ consensus is that more time will be taken until the makers come up with means to turn the tables. “The automobile industry of Korea enjoyed a higher interna tional standing during the past couple of years thanks to higher quality standards mixed with their competitive edge in terms of price, but things are not rosy down the road,” the director remarked. “Korean manufacturers would be well advised to focus more on R&D in the long term than on stopgap measures for the sake of profitability.”

Petrochemicals

Petrochemicals are seeing stable global demand.The petrochemical industry is predicted to show better signs than the previous year, amid stable global demand and petroleum prices. In addition, the Foreign Investment Promotion Act has passed the National Assembly and is expected to lead to more joint business opportunities with foreign companies. The Northeast Oil Hub Project is on the anvil, too.

Last year, the production facilities for base and intermediary materials such as toluene and paraxylene were expanded for higher output. The electronics, automobile and other related sectors grew to generate a larger demand too. The trends are forecast to continue across 2014.

Still, there is a possibility that the demand in China would be reduced significantly, as the country is raising the ratio of self-developed petrochemical products. “The oversupply in Northeast Asia and the shortage of demand in China could pose risks in the long term,” Hyundai Research Institute warned. “At the same time, the competition is now more intense than ever because of the cheaper products supplied from the Middle East and Southeast Asia.”

The oil refinery sector, in the meantime, seems to have a hard time getting out of a recession, although no structure change as in the recent economic crisis is in sight. China and Indonesia, two of the major export destinations, are increasing their refining capacity and self-supply ratio, while the falling demand for naphtha is exacerbating the margin of refineries. One of the few bright sides is that Korean companies are successfully opening up new markets abroad in the Middle East and Africa.

The risks associated with profitability are around as well. The exports of petroleum-based products, which exceeded those of semiconductors for the first time in 2012 to become the country’s top export item, ranked second last year. Not a single one of the four major oil refinery companies in Korea posted an increase in sales between 2012 and 2013, due to declining exports.

Steel

Steel is reducing its output due to a supply glut.Since the financial crisis in 2008, the steel industry has been mired in a long-lasting recession due to the surge in the won-dollar rate and declining global demand. POSCO has recently cut its production for the first time in four decades and Hyundai Steel has reduced its reinforcing bar output as well.

The supply glut has been exacerbated since that year to hinder the international price recovery. The outlook is not quite bright for this year, either. “The global steel market will keep suffering from oversupply throughout 2014 and thus Korean steelmakers will have to make inroads into overseas markets even more aggressively to offset their losses in Korea while trying hard for a sounder financial structure,” SK Securities analyst Lee Won-jae advised.

Nonetheless, the government is anticipating that the global steel market will show signs of at least some improvement this year as the recession of 2013 was so severe. The base effect and the start of operation of new production facilities by POSCO, Hyundai Steel and many more are expected to result in increased output. Still, they are likely to have to wait for a while until any significant recovery in performance owing to the neck-and-neck competition brought out by the excess capacity.

Shipbuilding & Marine Plant Construction

Shipbuilding is facing a domino-type collapse.The shipbuilding industry, which benefitted greatly from the higher exchange rate during the 2007 financial crisis, is now facing the risk of domino-type collapse as a series of shippers have cancelled their orders amid the global economic downturn. They are severely threatened by the decrease in orders, dropping shipping costs and less financial assistance.

“The amount of new orders is estimated to be 20% less than that of last year,” said KDB Securities researcher Seong Ki-jong, continuing, “The top three in Korea cannot but seek a breakthrough in the development of offshore plants and high added value vessels.”

In 2013, they enjoyed better-than-expected business results thanks to a surge in the volume of orders and improved price indices. However, the recovery of the shipping industry is delayed at present and the number of new orders is going down in the offshore plant segment. Besides, the delay in the building of tailored marine vessels is likely to add to the trouble.

Meanwhile, the government is expecting that Korean shipbuilders will be able to come up with better results this year on the order obtainment and export sides alike because they are considered to be way more competitive than their rivals in the green ship, LNG carrier, marine plant sectors and the like.

Machinery & Textiles

Textile exports are increasing.The machinery industry had to go through a slump last year due to the weak yen and the plunge in the demand from the Middle East, although the issue of inventory accumulation in China was addressed well and the investment in the ASEAN region continued during the second half of 2013. In 2014, it is forecast to enjoy some increase in capital expenditure as the automobile and construction industries are looking upward.

The textile sector also had a relatively good year in 2013 as the exports to the ASEAN countries increased and the KoreaTurkey FTA became effective. Cotton manufacturers expanded their facilities to raise the cotton production, too. The same trends are anticipated this year with the growth of the Southeast Asian markets and the increase in the output of carbon fiber.

Transport & Logistics

The transport industry will remain sluggish.The transport industry is predicted to remain sluggish, whether aviation, logistics and maritime transport. Hanjin Shipping and Hyundai Merchant Marine had to announce their self-help plans in the wake of the long-term recession and Korean Air ended up selling its shares in S-Oil because of a high debt ratio.

“The new year requires us to focus more on our fundamentals and further refine our risk management capabilities for greater chance of survival,” Korea Shipowners’ Association chairman Lee Yoon-jae emphasized, “We should get ourselves full ready to dominate new markets in advance.”

The aviation industry of this year is characterized by a drop in the number of inbound tourists from Japan and China and freight volume, which prevailed during the course of 2013 as well. “The passenger and cargo demands are expected to show a gradual growth thanks to the recovery of the US economy and the international petroleum prices are likely to remain stable despite the geopolitical risks in the Middle East,” the International Air Transport Association (IATA) mentioned recently.

Air Asia, the largest low-cost carrier in Southeast Asia, is looking to set up a subsidiary in Korea, making the seven national airline companies extremely nervous. The new entry, along with the ongoing recession, could result in a sizeable crisis in the aviation industry.

Overseas Construction

Overseas construction is looking to set a new record.​According to the International Contractors Association of Korea (ICAK), Korean builders are expected to win a total value of overseas construction orders of US$72 billion this year to set a new record in four years by a margin of US$400 million.

It is currently said that mega-scale orders are around the corner in the Middle East and North Africa and the value for January is estimated to exceed US$7 billion sooner or later. More of such plant construction projects are waiting mainly in the Middle East from February, too.

“A number of large-scale petrochemical plant construction plants were temporarily halted in 2013 in the petroleum producing countries of the Middle East but are scheduled to resumed in earnest this year,” said the Ministry of Land, Infrastructure and Transport. It continued, “In addition, more infrastructure and plant construction projects are expected to be underway in Asia, including Singapore, Vietnam and Malaysia, for Korean builders to further improve their performance.”

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