Global Steel Trade; Structural Problems and Future Solutions

negotiations for the purchase of Hanbo Steel finally concluded in early March 2000, when a U.S.-led
private consortium 17 signed a purchase agreement to pay approximately $500 million in cash for the
insolvent steel mill. The purchase of Hanbo, which also includes the participation of some Korean business
interests, does not include an assumption of the company’s outstanding debts. The transaction is still
pending while all the details are being finalized.
Window on Underlying Problems. The case of Hanbo is important because it illustrates the close ties
among the Korean government, private banks, and the country’s chaebol that resulted in imprudent lending
to steel producers. Hanbo is also important because it shows that these relationships influence the exit
process for ailing firms in Korea. Motivated by understandable concerns about economy-wide disruption
and systemic failure, the Korean government responded to the crisis by providing financial assistance to
banks and corporations. However, it is important to recognize that government policies and private
practices in the years leading up to the Asian financial crisis contributed to the structural weaknesses in the
Korean economy. In March 2000, the Korean Ministry of Finance and Economy and the Financial
Supervisory Commission (the independent financial regulatory agency) acknowledged these conditions.
Asserting the importance of recent reforms, these agencies stated that “We just escaped from a financial
crisis caused by government interference in the financial sector and by improper ties between political
circles and enterprises.” 18
Unsound Lending Practices Contributed to
Uneconomic Investments
Hanbo represents an extreme example of government-industry ties. However, the company’s overly
ambitious, debt-financed expansion is characteristic of the expansion of many Korean steel producers
during the 1990s. 19 In particular, it illustrates the extent to which Korean steel companies borrowed
excessively to finance the investment boom of the 1990s.
Investment grew rapidly in the steel industry, averaging more than 43 percent per annum from 1993 to
1996 (Chart 3-30). As late as 1996, investment in new steel capacity continued to grow, increasing by 53
percent over 1995 levels. 20 The growth rate of investment contrasts sharply with a growth in estimated
apparent domestic consumption of crude steel averaging only about 14 percent per annum from 1993 to
1996. 21 While the rate of new investments began to decline after 1996, investment levels remained high,
especially considering the dire economic conditions of 1997 and 1998.
The vast majority of the facility investment by steel producers was in expanded capacity. For example, as
late as 1997, more than 62 percent of new facility investment by steel producers went to create new
production capacity. 23 By 1998, capacity among electric arc furnace producers had increased by about 32
percent above 1995 levels. 24
Many of these investments
were highly concentrated
among mini-mill producers,
3-30. Facility Investment in the Steel Industry and Percent Change 22
most of which belonged to the
chaebol.
Year Facility Investment Percent Change
At the same time, the debt
levels of these companies
began to grow significantly.
Steel companies borrowed huge
amounts from private
commercial banks and
government-owned banks
1993 2,131 -
1994 3,034 42
1995 4,102 35
1996 6,277 53
1997 4,551 -28
1998 2,965 -35
1999 1,902 -36
Source: Korea Iron and Steel Association.
Chapter 3: Behind the Crisis—Korea 87