Global Steel Trade; Structural Problems and Future Solutions

Structural Problems in Context: A Brief History
Throughout the 1990s, Korea’s financial system suffered from fundamental corporate governance
problems, including close links between the government, banks, and the chaebol. These links fueled
imprudent lending practices, which resulted in overinvestment in risky projects. If the chaebol
encountered financial difficulties, the government often intervened with the banks to ensure a steady
stream of financing. Moreover, there was an implicit government guarantee extended to the chaebol,
because they were considered simply “too big to fail.” This government insurance resulted in the
government and banks repeatedly providing bailout loans rather than leaving failing firms to market
forces or court decisions based upon the bankruptcy laws.
As long as the economy continued to experience rapid growth and high demand, the system worked.
However, in the late 1990s, the system began to unravel when the Hanbo Steel scandal broke and seven
highly leveraged chaebol declared bankruptcy, with devastating effect on the economy. The concentration
of bank loans to a few large conglomerates fundamentally weakened and threatened the viability of many
Korean financial institutions. Ultimately, the government took control of many insolvent financial institutions,
including Korea First and Seoul First, lenders with large exposures to the steel industry.
As bankruptcies rose by 50 percent during the economic crisis of 1997, the long-standing flaws in
Korea’s insolvency laws and procedures became increasingly apparent. The distortions in credit
allocation continued in 1997 as bank loans to the country’s thirty largest chaebol increased by 43
percent, many of which potentially were emergency loans at concessionary rates that helped ailing
chaebol weather the crisis. As debts mounted and banks began to face serious liquidity problems, the
government could no longer hold back the financial pressures, and the Korean economy spiraled into
a deep financial crisis.
during the years before the financial crisis. A significant amount of this financing came from the KDB. 25
These practices reflected long-standing tendencies in the Korean banking and corporate sectors (see box). 26
Moreover, in a number of countervailing duty cases, the Commerce Department determined that bank
lending practices in Korea constituted countervailable subsidies. 27
Tough Times in the Korean Steel Industry
Massive borrowing led to soaring debt-to-equity ratios for many Korean steel producers (Chart 3-31). 28
The most highly leveraged and unprofitable producers were Hanbo Steel, Sammi Steel, and Kia Steel. Even
companies that were not technically insolvent had high debt-to-equity ratios, ranging from 200 percent to
3-31. Debt Ratios and Operating Margins of Major Korean Producers
Producer
Debt-to-Equity Ratio 32 Operating Income Margin 33
1995 1996 1997 1998 1995 1996 1997 1998
Hanbo 838 3,196 n/a n/a 0.9 -9.2 -21.3 -16.5
Sammi 644 1,754 n/a n/a 7.8 2.0 -14.7 0.5
Kia 824 2,792 n/a n/a -4.6 -1.2 -18.6 -20.1
Inchon Iron and Steel 205 213 263 168 2.2 1.1 0.6 0.7
Dongkuk Steel Mill 168 213 380 239 3.1 3.4 -0.8 -1.4
Dongbu Steel Co. 237 114 215 349 3.1 1.5 1.5 1.4
Kangwon Industries 267 417 219 273 2.4 -2.3 -2.2 -6.4
Hyundai Pipe Co. 264 255 699 393 -1.7 -1.7 1.2 1.5
n/a = not applicable due to negative equity figures for those time periods.
Source: Korea Iron and Steel Association Yearbook, 1998.
88 Global Steel Trade: Structural Problems and Future Solutions