Global Steel Trade; Structural Problems and Future Solutions

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estructuring stage in the aftermath of the crisis is over, and the Korean government is now entering the longer-term process of corporate and financial institution reform. • The Korean government has established general guidelines for restructuring the steel industry over the next several years. However, while some individual firms have committed to reducing capacity, restructuring efforts by the industry in general have been slow, in spite of continued low capacity utilization rates in 1999. • Another problem is the government’s continued role in POSCO, Korea’s largest steel producer. • The government has made important progress in financial sector restructuring and reform. However, its direct ownership of several nationalized commercial banks could allow continued intervention in the financial sector and could impede corporate restructuring, including in the steel industry. • The government has also enacted new bankruptcy laws and implemented out-of-court market-oriented exit procedures that should address the problem of steel producers staying in the market well beyond their financial viability. Steel Industry Restructuring Leads to New Giants and Additional Capacity During the period leading up to the Asian financial crisis, underlying structural weaknesses in the financial and corporate sectors contributed to market distortions in Korea’s steel industry. Heavily indebted firms such as Hanbo and Kia continued to borrow for investments in production facilities, contributing to excess capacity and, ultimately, to insolvency. 62 Over the last few years, Korean steel companies have reduced some of their debt burden, mainly through debt-to-equity swaps. However, it is difficult to ascertain whether these swaps were market-based and what effect they had on the health of steel companies. The Korean government’s overall economic restructuring plans include general guidelines for steel industry restructuring to take place over the next several years: • Finalizing and implementing the liquidation and workout plans in progress. • Increasing capacity utilization by rationalizing production capacity. • Supporting financially weak, but viable, steel producers by allowing creditor banks to offer conversions of debt into equity, reductions in interest rates, and new loans. • Promoting mergers, acquisitions, liquidations and plant shutdowns. • Persuading the steel industry to adopt strategies focused on core competencies along company or product lines. 63 Undoubtedly, corporate restructuring cannot be accomplished overnight. The government has yet to fully implement these guidelines, which have been in place for some time now, and steel sector restructuring appears to be progressing slowly. The slow pace of these efforts raises concerns about further market distortions in the steel sector, particularly with respect to the financial support provided to weak steel companies. Mergers and Acquisitions Under the above guidelines, several mergers and acquisitions are pending or have already taken place. Merging and further privatizing steel companies should help to eliminate or rationalize uneconomic capacity while improving the efficiency of existing capacity as consolidated companies focus on core operations. In addition to the purchase of Hanbo Steel (see box, next page), 64 there have been major changes, which include the following: • In March 2000, Inchon Steel absorbed Kangwon Industries, creating the world’s second largest minimill producer after U.S. firm Nucor. This merger could lead to accelerated capacity reductions, particularly for carbon steel angles, shapes, and sections. 130 Global Steel Trade: Structural Problems and Future Solutions
U.S. Firm Takes Over Hanbo Steel Protracted negotiations for the purchase of Hanbo Steel concluded in March 2000 when the Nabors Consortium (a U.S.-based investment firm) signed a purchase agreement to pay approximately $500 million in cash for the insolvent mill. Once the final sale is concluded, Nabors is expected to liquidate Hanbo and establish a new company to take over Hanbo’s assets and employees. The new company would be free from Hanbo’s debts, while Hanbo’s creditors (many government-controlled) and public funds will absorb the reportedly significant balance of the debt not recovered by Hanbo’s sale. Nabors plans to diversify its new steel production from Hanbo’s current production and to collaborate with U.S. Steel and Hylsa of Mexico in rehabilitating the ailing steel producer. Current plans for the new company include: • Restarting the hot-rolled carbon steel coil mill (capacity: 1.8 million MT) as soon as the final sale is concluded. • Completing a cold-rolled carbon steel mill (capacity: 2 million MT of crude steel). • Completing the Corex mill (capacity: 2.5 million MT of hot-rolled carbon steel coil) within the next few years. • In May 2000, Inchon Iron & Steel (Inchon Steel), now a subsidiary of the Hyundai Group, announced that it would acquire Sammi Steel. If the acquisition is approved by the Korea Fair Trade Commission (KFTC), the new company will surpass POSCO as Korea’s largest stainless steel producer, holding 43 percent of the market, while POSCO will hold only 31 percent of the market. 65 • Industry experts expect the Hyundai Group to further merge Hyundai Pipe into the new Inchon Steel. 66 The Hyundai Group plans to spin off the merged steel firm later this year. • Acquisitions across borders have also taken place. A Japanese investment company purchased a 41 percent equity interest in Hyundai Pipe, making it the largest shareholder. 67 These industry developments could lead to the emergence of a steel giant out of the former Inchon Steel, Sammi Steel, Kangwon Industries, and Hyundai Pipe. Restructuring of the Korean steel industry holds great promise for eliminating or rationalizing uneconomic capacity. Some individual firms have committed to reducing capacity. However, restructuring efforts by the industry in general have been slow in spite of continued low capacity utilization rates in 1999. The government has not announced specific actions it will take to implement the restructuring guidelines and address this problem. Again, the future of the Korean steel industry depends largely on the will of industry and the government to sustain momentum for change. POSCO’s Monopolistic Position in the Domestic Market Before competition can truly take hold in the Korean steel sector, the Korean government must follow through with its privatization of POSCO. As Korea’s—and the world’s—largest steel company, POSCO has a monopolistic position in the Korean market for certain major steel products and maintains its power over the distribution sector. As part of the Korean government’s privatization program, and at the urging of the U.S. government to fully privatize POSCO, a portion of POSCO’s shares held by the governmentowned Korean Development Bank (KDB) were sold in July 1999. During that offering, KDB’s ownership position was reduced from 21 percent to 13 percent. At that time, the Korean government stated emphatically that the rest of the shares held by KDB would be sold by the end of 1999. Even though KDB offered 12 percent of POSCO shares in December 1999, the sale was called off due to differences in bid prices for the shares and the price that the government wanted to obtain for the shares. 68 However, immediately after the failed December bidding, KDB sold 3 percent of those shares to POSCO, Chapter 5: Reforms and Restructuring Abroad 131
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Preface This report is the product
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Contents Preface ..................
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CHAPTER 1 Overview Introduction Ove
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steel prices and still make money (
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History of Steel Trade Friction The
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• Led by “mini-mill” companie
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New Players in the Global Steel Mar
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CHAPTER 2 The U.S. Steel Import Cri
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The Steel Workers’ Perspective on
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1997: A Cloud Behind Every Silver L
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These productivity increases and sh
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In mid-1998, financial crisis hit R
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concerns regarding purchase allocat
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percent from Korea, and 59 percent
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from Brazil, Japan, and Russia. 58
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finished steel prices is very compl
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Department of Commerce determined t
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The Role of Trading Companies Tradi
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Trading companies viewed these atyp
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Weirton, W.V.: A Community Unites i
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CHAPTER 3 Behind the Crisis Introdu
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Competition has been restrained by
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When the Asian economic crisis sapp
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The Russian steel industry has made
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steel is traded between the world
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estructuring of companies and predi
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Under the conditions of introducing
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When prices began to escalate after
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pension payments) reached almost 20
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exports extremely profitable, the b
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Trading Companies and the Marketing
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these intermediaries, one source es
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• Domestic demand for hotrolled s
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Although the production facilities
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3.2 Structural Factors and Japanese
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apparent in the marked differences
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High Domestic Prices The apparent c
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outstripped growth in domestic dema
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Noncompetitive Domestic Market and
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Professor Tilton’s price analysis
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The Product Certification System Ad
Page 85 and 86: Three factors contributed to tippin
Page 87 and 88: Collapse of Asian Export Markets At
Page 89 and 90: at a loss. The rationale for pricin
Page 91 and 92: 3.3 Korea’s Steel Industry in The
Page 93 and 94: negotiations for the purchase of Ha
Page 95 and 96: almost 700 percent (Chart 3-31). By
Page 97 and 98: of 1997 and 1998, when capacity uti
Page 99 and 100: • Regulating POSCO after privatiz
Page 101 and 102: approximately 32 percent from 1997
Page 103 and 104: denominated revenue. For other mini
Page 105 and 106: Rounding Out the Big Three Usiminas
Page 107 and 108: Chapter 3: Behind the Crisis—Braz
Page 109 and 110: Import Licensing System Importers m
Page 111 and 112: they were able to cut their prices,
Page 113 and 114: CHAPTER 4 U.S. Response to the Cris
Page 115 and 116: compared to November 1998 and conti
Page 117 and 118: downstream products. The U.S. indus
Page 119 and 120: for by the WTO. The industry argues
Page 121 and 122: Effect of Excess Inventories Much o
Page 123 and 124: coke but also to the large increase
Page 125 and 126: The Role of the Chinese Coke Indust
Page 127 and 128: CHAPTER 5 Reforms and Restructuring
Page 129 and 130: The current dramatic economic and s
Page 131 and 132: While this analysis is largely corr
Page 133 and 134: these four heavyweights will be abl
Page 135: Government Initiatives to Encourage
Page 139 and 140: ensure that the commercial banks fo
Page 141 and 142: Again, while these efforts hold pro
Page 143 and 144: Brazil-IMF Reform Program Throughou
Page 145 and 146: CHAPTER 6 New Players in the Global
Page 147 and 148: • Be subject to strong subsidy di
Page 149 and 150: Technological Backwardness. China
Page 151 and 152: 100 kg at present. Per capita consu
Page 153 and 154: Current Reform Efforts in the State
Page 155 and 156: wire rod production with an annual
Page 157 and 158: Notwithstanding the negative impact
Page 159 and 160: Media reports and interviews with v
Page 161 and 162: Baoshan is not equipped to provide
Page 163 and 164: Domestic Consumption In 1998, Ukrai
Page 165 and 166: two firms, Enakievo and Konstantino
Page 167 and 168: • Barter. Ukrainian steel compani
Page 169 and 170: Today India is the world’s tenth
Page 171 and 172: among steel-intensive sectors, such
Page 173 and 174: Banks’ Debt and Equity Exposure D
Page 175 and 176: Tariffs. High tariff rates also con
Page 177 and 178: new sales growth. 196 By 1998, even
Page 179 and 180: CHAPTER 7 Avoiding Future Crises In
Page 181 and 182: propose to monitor additional data
Page 183 and 184: determination of dumping. In Octobe
Page 185 and 186: Engaging Korea On Hanbo In late 199
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Korea Korea’s steel industry has
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New Players: China, Ukraine, and In
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government and private sector assis
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Notes Chapter 1 1. Difference of av
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massive layoff data shows 9,550 emp
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also possess weaknesses, which the
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64. Ibid., 145-177. 65. Id. Bethleh
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ITC considered numerous factors. On
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104. Harry Thuedaus was recently re
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Frank Markus, Successes and Failure
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Decrepit Steel Plant in the Urals,
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2. WTO. At the time of this report,
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Among those who have written on thi
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line pipe markets, the European and
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97. Merrill Lynch, “Steel Industr
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chaebol to downside risk. This crea
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provided after 1991 by domestic ban
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61. Catholic University of Korea Pr
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acquired on economically viable ter
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date of publication in printed vers
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Producers of iron ore and coke, the
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production may be shut down by the
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56. U.S. government sources. 57.
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79. World Bank-Korea, 12. 80. Seong
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24. 24. “Hard Times for China’s
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60. “PRC To Further Cut Steel Out
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132. In terms of crude steel produc
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195. The capacity of the new steel
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