Global Steel Trade; Structural Problems and Future Solutions

These developments raise a fundamental concern about competition within the Korean steel market and
possible trade-distorting effects that POSCO’s continued dominance may have in the future.
Korea’s Bank Lending Practices:
The Loan-Financed Boom in the Steel Industry
A Case Study: Hanbo Steel Company
Hanbo Iron and Steel Co., Ltd. exemplified the impact that Korea’s weak bank lending practices had on the
steel industry as well as the relationships among the government, banks and companies that characterized
Korea’s flawed regime for nonviable and insolvent firms.
Hanbo, Korea’s second largest steel company, collapsed in 1997 after amassing over $6 billion in debt 6
(sixteen times its net worth). 7 This debt was incurred in the process of expanding the company’s
steelmaking capacity by nearly 9 million metric tons (MT). 8 While steel was not part of Hanbo’s core
business, the decision to expand into steel was typical of the diversification strategy pursued by Korean
chaebol in the 1990s.
Hanbo financed its new steel mill with borrowings from private commercial banks and government-owned
banks, including the Korea Development Bank (KDB), Korea’s largest lender. According to one report, 80
percent of Hanbo’s imported mill equipment was financed with a preferential 1.5 percent loan from a
government-owned bank. 9 An investigation ultimately revealed that government officials, after taking large
sums in bribes, had exerted pressure on bank executives to provide unsecured loans to Hanbo.
Subsequently, ten people—a former Cabinet minister, four legislators, three bank heads and two Hanbo
executives—were indicted on charges of giving or receiving millions of dollars in bribes in exchange for
helping to arrange the loans to Hanbo.
In addition to pressuring banks to lend funds, Korea’s government provided millions of dollars to the
struggling steel maker to keep operations running after the company declared bankruptcy in January 1997.
As Korea’s second largest steel producer and flagship company of the Hanbo Group (then the eighteenth
largest chaebol in the nation 10 ), it was obvious that the firm’s collapse would have repercussions on the
whole economy. A high-level Ministry of Finance official, Yoon Tae-yong, was quoted as saying, “for the
benefit of the national economy, we must keep the plant operating,” adding that the money would come
from government-controlled banks. 11 The emergency loans that were provided by government-controlled
banks at reduced interest rates 12 were typical examples of measures taken to implement a “too big to fail”
policy that perpetuated government intervention in the industrial sector. 13
Some Korean steel producers, however, complained at the time to the government that Hanbo’s debt relief
“is allowing it unfairly to undercut prices in an already slow market.” 14 In the meantime, Hanbo continued
production because the company’s creditors provided it with yet more financing. Some producers argued
that Hanbo could undercut their prices by up to 16 percent and urged the government to either sell Hanbo’s
plants to overseas buyers or completely close the company. 15
Insolvency and U.S. Involvement. Although Hanbo declared its insolvency in January 1997, the steel
company continued to operate while receiving infusions of capital, partly through government pressure on
banks. During this time, the U.S. Government engaged the Korean government in discussions aimed at
ending any market-distorting subsidies to Hanbo and ensuring a market-driven sale of the company.
In July 1998, Hanbo temporarily closed its hot-rolling plant. Hanbo’s remaining rebar and structurals
production facilities continued in operation. As a result of shutting down the hot-rolling facilities, the
company’s production decreased from 2.3 million MT in 1997 to 1.4 million MT in 1998. 16 Protracted
86 Global Steel Trade: Structural Problems and Future Solutions