Global Steel Trade; Structural Problems and Future Solutions

almost 700 percent (Chart 3-31). By comparison, debt-to-equity ratios for the top five major U.S. steel
companies in 1997 ranged from 9 percent to 38 percent. 29
In Taiwan, whose economy resembles Korea’s more closely than that of the United States, debt-to-equity ratios
for manufacturing companies have been below 100 percent since 1990. 30 Korean corporations’ overall debt
levels, in terms of the ratio of financial expense to sales, were three times higher than in Japan and Taiwan. 31
The profitability of many steel producers declined as debt levels continued to rise during the expansion of
the mid-1990s. Net income for the most highly leveraged steel companies started to turn sharply negative in
1996, well before the Asian financial crisis, reaching negative 21 percent (of sales) for Hanbo in 1997.
Other major steel producers experienced negative (net) operating income margins; for example, Kangwon
Industries had negative ratios for three years, also largely due to high debt levels. (Chart 3-31).
Hanbo and four other major steel
producers declared bankruptcy
in 1997. 34 Hankook Steel Mill
and Kangwon Industries faced
serious financial problems from
excess borrowing to finance new
capacity.
The huge buildup in new plants
and facilities during the 1990s,
and the resulting domestic
competition, led to lower
capacity utilization rates
among Korean mini-mills,
which averaged 76 percent
between 1995 and 1998, and
reached a low of 69 percent
during Korea’s economic crisis
in 1998 35 (Chart 3-32).
Capacity utilization would
Metric Tons (millions)
25
20
15
10
5
0
1995 1996 1997 1998 1999*
*1999 data thru June 1999 for capacity but projecting the whole year for production.
Source: Korea Market Study.
3-32. Electric Arc Producers, Capacity Utilization Rates (Crude Steel)
have been much lower had it not been for the huge increase in exports. The dominant categories of U.S.
imports from Korea in 1998 were typical mini-mill products, such as structural steel and rebar. Most of
these imports came from the mini-mill producers, many of which were highly indebted or bankrupt.
By 1997 and prior to the onset of the financial crisis, the Korean steel industry was already in bad shape. The
five major producers that had declared bankruptcy and several others facing financial difficulties were placed
in government-led debt workout programs. It is unlikely that many of these firms would have survived without
direct or indirect government intervention. As a result, very little nonviable steel capacity was eliminated.
Because the pattern of excessive debts and bankruptcy was repeated throughout the Korean economy,
unsound bank lending practices also contributed indirectly to the decline in demand from steel users in
Korea who were themselves experiencing financial difficulties.
Ineffective Bankruptcy Process
Capacity Production Utilization
The continued provision of low-cost loans from private commercial banks and government-owned banks
allowed many nonviable steel producers to keep operating, in some cases well into the crisis. Debt-laden
firms and their creditors opted for debt restructuring rather than in-court bankruptcy proceedings, and the
Chapter 3: Behind the Crisis—Korea 89
85%
80%
75%
70%
65%
60%
Capacity Utilization Rates