Global Steel Trade; Structural Problems and Future Solutions

3.3 Korea’s Steel Industry in The 1990s:
Boom, Bust And Export
Introduction
Problems in the Korean steel industry stem from two major structural flaws.
Unsound Bank Lending. Korea’s bank lending practices allowed the country’s manufacturing sectors,
including steel, to invest in overly ambitious projects that expanded capacity. Lending decisions of private
banks were often subject to direct or indirect government influence, and many Korean banks lacked
appropriate risk assessment and risk management techniques. 1 Weak lending practices were only one of the
many significant factors that contributed to over-investment and excess capacity among Korean chaebol,
including those producing steel. The 1999 Economic Report of the President addressed the problems
associated with Korea’s bank lending practices, stating:
In Korea, excessive investment was concentrated among the chaebol, [whose] control of financial
institutions, together with government policies of directed lending to favored sectors, led to
overinvestment in such industries as automobiles, steel, shipbuilding, and semiconductors. By early
1997, well before the crisis hit Korea, seven of the thirty main chaebol were effectively bankrupt. 2
Although many of these practices have changed as a result of the financial sector reforms that Korea has
implemented under its International Monetary Fund (IMF) program, it is too early to tell whether those
reforms have eliminated all of the past lending practices and the government’s influence over the financial
sector. 3
The drop in domestic demand for steel during the financial crisis and the depreciation of the Korean won, which
made exporting more attractive to Korea’s producers, led to an inevitable increase in Korea’s steel exports in
1998. However, there are several indications that many steel companies continued to produce and export steel
long after they had passed the point of financial viability. This fact raises two fundamental concerns:
• Unsound bank lending practices contributed to the buildup of excess capacity during the 1990s and a
string of bankruptcies in steel 4 and other sectors.
• Korea’s flawed bankruptcy regime 5 allowed nonviable steel companies to continue operating and
exporting, and to avoid plant closings or other significant reductions in production.
POSCO’s Dominant Position. In 1998, Korea’s Fair Trade Commission (KFTC) found that POSCO’s
monopolistic position had anticompetitive effects on the Korean steel market. The KFTC also raised
concerns about POSCO’s continued dominance in Korea because of the company’s potential to abuse its
market power. Despite the KFTC ruling, only minimal action has been taken to curtail POSCO’s dominant
position.
Further, as a government-owned company, POSCO was used by policymakers to advance the government’s
industrial development objectives, which included the provision of low-cost steel to downstream producers.
The Commerce Department found this to be an export subsidy in a recent countervailing duty investigation.
Chapter 3: Behind the Crisis—Korea 85