Mixed by Industry

With a global economic slowdown now looking inevitable, South Korea’s major industries are predicted to be affected considerably. The 2012 industrial outlook for South Korea by domestic economic research institutes, the industry association, and economic organizations, shows that the petrochemical, wireless communication device, and automotive industries are predicted to exhibit strong performances in 2012.

However, the steel, shipbuilding, and construction industries are unlikely to escape depression. In particular, a vast majority of experts agree that South Korea’s flagship industries, such as semiconductors and displays, will experience a tough time. Here is the 2012 outlook for the 10 major industries that support South Korea’s economy.

Semiconductor

Exports Decrease for 2 Consecutive Years, but Will Recover in Latter Half of Year

Excessive investment in facilities from 2009 to 2010 sent memory semiconductor prices into a downward spiral in 2011. Semiconductor exports, which account for 11 percent of Korea’s exports, have declined year-on-year in 2011. Pessimistic outlooks for the semiconductor industry in 2012 are dominant. The Korea Institute for Industrial Economics & Trade (KIET) has predicted that semiconductor exports and production will decline 1.9 percent and 2.1 percent, respectively year-on-year in 2012. Meanwhile, the Korea Semiconductor Industry Association (KSIA) predicted that semiconductor exports will decline for 2 consecutive years due to the continued shrinking of the PC market. A survey of 502 export manufacturers conducted by the Federation of Korean Industries (FKI) shows that the prospect for semiconductor exports is the second worst after textile and clothing among South Korea’s top 10 major export businesses.

However, it is forecast that the semiconductor industry will move away from depression. The Korea Trade-Investment Promotion Agency (KOTRA) has predicted that demand for DRAMs will turn around beginning the first half of 2012, with the non-volatile memory (NVM) industry, such as NAND flash memory, growing steadily due to the increase in demand for smart devices. Lee Joo-wan, a researcher at the Hana Institute of Finance in Seoul, said, “The continued downward pressure on prices is deepening the slump in the memory sector and future economic prospects are negative”, adding, “However, the oversupply of memory semiconductors will be solved in the first half of 2012 and the industry will begin recovering in the second half”. The size of the investment by SK Group which recently acquired Hynix Semiconductor, and the timing of Samsung Electronics’ establishment of plants in China are the keys to reading the semiconductor market situation.

Display

Solutions to Negative Factors from China out of Sight

Display exports in 2011 declined for the first time since 2000. The display market, which is mired in deep recession, is expected to suffer further in 2012. FKI predicted that the display market will begin upward growth in 2012 after its long-lasting slump. However, base effects caused by the recession in 2011 are likely to be responsible for the upturn.

Domestic industries are claiming they cannot find how to overcome the negative impact from China. The prices of liquid crystal display (LCD) panels dropped 20 percent in 2011. With the Chinese government’s support, Chinese manufacturers created an oversupply of LCD panels. The Chinese government has provided financial aid totaling 100 billion yuan (approximately 18.3 trillion won) to its domestic LCD industry over the last 3 years. Despite huge deficits, China’s LCD panel manufacturers have continued to increase facility investments and production, putting downward pressure on prices and increasing their market presence. It is expected that this trend will continue in 2012. The Hyundai Economic Research Institute (HERI) said that there will be no huge improvement in the LCD panel market. The Hana Institute of Finance (HIF) has predicted that as the supply of Chinese LCD panels increases amid weak demand, the current slump in the display market will last longer due to the imbalance of supply and demand. However, KIET has predicted that the export situation will in fact improve in the second half of 2012 due to curbs on aggressive investment, high expectations for rising demand resulting from the London Olympics, and rising demand in emerging markets.

Wireless Communication Device

South Korea’s Market Presence Will Expand amid Rising Demand

The 2012 industrial weather forecast calls for sunny skies for the wireless communication device industry. It is predicted that Samsung Electronics, which has positioned itself as a strong rival to Apple, and the smartphones of LG Electronics, which is increasing its market penetration at a fast pace, will function as cash cows. KIET predicted that mobile phone exports will grow 6.9 percent in 2012 year-on-year, citing that amid expanding 4G mobile communication service markets, domestic smartphones have gained a competitive edge in the global market. Kwon Sung-ryul, head of the company analysis department of Dongbu Securities, said, “The 4G LTE (long-term evolution) market is expected to grow sharply from 8.2 million in 2011 to 31.6 million in 2012.”

Emerging nations are expected to pull the market forward. The Hana Institute of Finance predicted that the economic recovery of advanced countries is likely to be delayed, whereas demand for mobile phones in emerging countries will continue to grow in a stable manner. A recent survey regarding the export outlook of 1,416 buyers and foreign companies by KOTRA revealed there are high expectations surrounding smartphones. KOTRA predicted that despite domestic smartphones once being defeated by the iPhone, demand for domestic smartphones will continue to grow steadily because of high preference in the US and Europe. However, there will be no huge growth in exports because domestic companies are expanding their overseas production.

Electronics and Home Appliances

Expect Rising Demand Resulting from Big Events such as London Olympics

Business sectors such as electronics and home appliances, which are highly susceptible to economic fluctuations, have high expectations regarding upcoming big events. The market outlook is mostly gloomy because consumer confidence in major markets such as the US and Europe is expected to weaken. DisplaySearch, a market research and consulting firm, recently released a report predicting sales in the global TV market will reach 254 million in 2012, 0.4 percent down from a forecast three months ago. The research firm predicted sales of LCD TVs will increase 9 percent in 2012, compared to 2011, but that sales of PDP TVs will decrease 15 percent over the same period.

Big events are key factors to increasing TV sales. Kwon Sung-ryul, head of the company analysis department of Dongbu Security, said, “In 2012, the London Olympics and Euro 2012 will be held, and 18 countries will make transitions to digital broadcasting. With this, demand for TVs and 3D TVs will increase further.” Emerging markets are also important factors. KOTRA has predicted that the expanding middle class; a result of economic growth in giant emerging countries, and the enhanced image of Korean products will increase demand for TVs. The KORUS FTA is expected to have a limited effect on TV sales.

At present, Samsung Electronics and LG Electronics occupy first and second place in regards to TV market presence in North America, respectively. The KORUS FTA would remove 5 percent export tariffs. However, it can also be said that there are no tariffs on their products because the two electronics giants produce most of their products in Mexico. The dominant outlook for the PC market is that the slump will last longer. iSuppli, a market research firm, has predicted that the 2012 growth rate of the whole PC market will be 6.8 percent, a similar level to 2011.

Automobiles

Hyundai Motor and Kia Motors to Expand Exports

South Korea’s automotive industry in 2011 offset some of the losses from sluggish domestic consumption through strong exports, and 2012 will not be an exception. However, experts mostly agree that export growth will lose steam compared to 2011, with automobile production expected to stagnate or rise slightly. The POSCO Research Institute (POSRI) predicted that automobile production will reach 4.48 million in 2012, the same as last year. HERI forecasted 4.6 million cars, while KIET stated 4.75 million. It is expected that domestic consumption will continue to weaken, with consumer purchasing power not recovering sharply due to the sluggish labor market and household debt. POSRI predicted that domestic sales will continue to decline until the first half of the year, before rebounding slightly in the second half.

The outlook for automobile exports is mixed. HERI has predicted that auto exports will increase 2 percent, claiming export growth will shrink due to depressed markets in advanced countries. POSRI predicted that in the first half of 2012, auto exports will decline 1.2 percent from the same period a year earlier, with auto exports growing 1.7 percent in the second half due to depressed markets in advanced countries, the weakening growth of emerging countries, and the vanishment of gains from the Japanese earthquake. On the contrary, KIET predicted that although demand for automobiles in advanced markets is expected to stagnate or decline, auto exports will increase 10.4 percent year on-year because emerging markets are growing and the quality and brand image of domestic automobiles overseas have improved. According to KOTRA, The exorts of auto parts, viewed as one of the biggest beneficiaries of the Korea-EU FTA and KORUS FTA, are expected to grow 10 percent.

Shipbuilding

Orders to Decline, but Demand for Special Vessels to Rise

Experts agree that there will be a fall in the number of orders received by domestic shipbuilders in 2012. This is because Europe’s large financial companies, which have the largest share of the global shipping financial market, are facing hard times. The shipping industry began to take a downturn in the second half of 2011, and this trend is expected to continue through 2012. KIET predicted that domestic ship production and exports will decline 13 percent and 8.4 percent, respectively in 2012. Sung Ki-jong, a researcher at Deawoo Securities, said, “Markets for container ships, tank ships and bulk carriers will perform poorly due to the oversupply.”

It is expected that there will be a boom in the market for high value-added special purpose vessels. HERI has predicted that exports of high value-added special ships will pick up speed and offset the stagnation in growth of other business sectors in 2012. There is expected to be a lasting boom in the LNG ship and marine plant markets because oil prices and demand for natural gas continue to rise, resulting in increased investment in developing natural resources such as crude oil and natural gas.

The wealth gap between large shipbuilders and small and medium-sized ones is expected to widen further in 2012. Large Korean shipbuilders have already obtained orders for works until 2014 because they had almost a monopoly on large marine plants in 2011. Jang Won-ik, a researcher at POSRI, said, “The shipbuilding industry is estimated to have passed its lowest point since the 2008 financial crisis, but the slump will last for some time. Following the bankruptcies of some small and medium-sized shipbuilders, the shipbuilding industry is likely to see some restructuring.”

Machinery

Strong Demand in China Will Lose Steam

With expanding investment in emerging markets, the machinery industry picked up speed in 2011. However, it is predicted to lose steam in 2012. Most experts agree that as economic uncertainty has grown, demand for machinery has fallen, yet it is expected to recover during the latter half of the year. One official from the Korea Association of Machinery Industry (KAMI) said, “With the help of demand for investment in China, the machinery industry grew more than 20 percent in 2011, but this will fall to the 10 percent level in 2012.” In 2012, markets in North America and Europe are expected to maintain demand at the 2011 level due to the effects of the Korea-EU FTA. In Japan, rising demand for machinery resulting from the earthquake and preference for Korean machinery because of the high yen, are expected to contribute to a good performance for the domestic machinery industry. Exports to markets in BRICs countries less susceptible to the direct impact of the financial crisis in advanced countries, as well as the Middle East, and Africa, are expected to improve because they are expanding investment in industrial facilities. There will also be a positive impact on demand in the domestic market due to old equipment being replaced and new investment by the government to develop equipment to produce 7 major products that function as new growth engines. However, a fall in domestic demand is predicted because companies are likely to slash investment.

China is a key factor in the increasing demand for machinery. South Korea’s machinery exports to China have expanded to 40 percent over the last several years. In 2011, the domestic machinery industry did not perform well in China because the Chinese government tightened rules and regulations. Sung Ki-jong, a researcher at Deawoo Securities, said, “Demand recovery as a consequence of China’s policy changes will have the biggest impact on South Korea’s machinery industry.”

Steel

Domestic Market Weak, but Exports to Emerging Nations Hopeful

According to the Korea Iron & Steel Association (KOSA), steel exports are expected to reach 30 million tons in 2012, a slight increase from 2011. Much cannot be expected from the domestic market because of the slump in automobile production, decreased shipbuilding, and continued depression in the construction market. KOSA predicted that steel consumption in the domestic market will drop 2 percent year-on-year in the first half of 2012, before rising 4.5 percent in the second half. Gong Mun-ki, a chief researcher at POSRI, said, “Steel exports are expected to grow only 6.2 percent, with domestic steel consumption expected to increase 1.2 percent in 2012.” KIET expects domestic steel consumption to remain at 0.3 percent.

Experts from other economic research institutes gave similar forecasts. Park Hyun-wook, a researcher at HMC Investment Securities, said, “Steel consumption in the global market will increase 5.5 percent year-on-year in 2012. As a result, growth rates in steel consumption this year will slow compared to 2011.” The reason is that steel consumption cannot pull the market forward as a result of sluggish demand in advanced economies (North America, the EU, etc) and China’s excessive expansion of steel production facilities. Jeong Guy-soo, a researcher at HIF, said, “The slump in the construction industry will continue, and slower growth rates in high demand industries such as IT and shipbuilding will be inevitable. The growth rate of crude steel production in the global market will slow down to 5 percent year-on-year.” What is a little better is that demand for steel in emerging markets will last longer. KIET has predicted that steel exports will increase 7.3 percent year-on-year because demand for steel in areas such as China, India, and South East Asia is continuing, and that domestic steel manufacturers are putting more effort into expanding exports. If the forecast is correct, steel exports are expected to surpass US$40 billion for the first time in history.

Petrochemical and Oil Refining

Exports to Emerging Nations to Continue and Outlook Bright

Among the 10 major industries that support South Korea’s economy, the petrochemical industry is expected to perform best in 2012. Domestic consumption of petrochemical products is expected to remain the same or rise slightly, yet exports to emerging markets are predicted to grow steadily. Furthermore, as China reduces investment in petrochemical facilities, the oversupply of petrochemical products in the global market is expected to be eased. KIET has predicted that petrochemical exports will grow 13.5 percent due to rising demand in the South East Asian and Indian markets in 2012. HIF predicted that despite a fall in demand in advanced countries, the supply and demand of petrochemical products will continue to grow significantly as a result of strong demand in emerging markets. Park Young-hoon, department head of IBK Investment & Securities, said, “The economic crisis will serve as a catalyst to improving the market situation.” “In the short-term, demand is likely to weaken, but in the long-term, suppliers will be able to obtain a competitive edge in the market because facility expansion restricted by the economic crisis creates tight supply and demand intermittently,” he added.

The prospects for the oil refining market are mostly bright. KOTRA said that exports of Korean petroleum products will increase due to growing demand in Japan, China, Brazil, and Indonesia. HIF has analyzed that exports will slow down slightly due to the decreasing effects of Japanese earthquake and weakened global demands, but that domestic demand is expected to take an upturn because petroleum product prices are being lowered as a result of declining oil prices and manufacturers maintaining stable operating rates. The financial institute also predicted that exports of refined oil will increase 6.4 percent year-on-year in 2012.

Construction

Investment to Rise Slightly but Full Recovery Be Difficult

It is predicted that the construction market, which remains trapped in a long-term depression, will not be able to move away from its weak performance in 2012. The government is attempting to revitalize the real estate market by easing regulations, but this is not working. Experts agree that demand in the housing market is expected to rise slightly, but that a full recovery is unlikely. Diminished investment in the public sector is also having a negative impact on the construction market. As the Four Major Rivers restoration project has been completed, the government’s budget for social overhead capital (SOC) is expected to be cut sharply. HERI has forecasted that the number of public sector construction orders received by construction companies will remain zero. POSRI has predicted that civil engineering investment and construction investment will grow 2.6 percent and 1.9 percent, respectively. POSRI said that as total construction investment would post 153 trillion won, which is lower than before the 2008 financial crisis, the construction market is highly unlikely to enter a full recovery phase.

There is also a possibility that despite the government’s budget cuts for SOC, facility investments beginning to recover in the latter half of 2012 can increase demand for industrial plants. The construction market will be positively affected by projects regarding the construction of government office buildings for public organizations moving to local provinces, as well as by investment expansion by the private sector in non-residential construction. It is also expected that the project financing (PF) market will be normalized because the number of unsold apartment buildings is decreasing and the restructuring of troubled savings banks has been completed. If the government further relaxes regulations regarding the real estate market and expands investment in the public sector amid the approaching general and Presidential elections in 2012, the construction market could recover quicker than expected.