Global Steel Trade; Structural Problems and Future Solutions

• Regulating POSCO after privatization to prevent unreasonable diversification.
• Removing restrictions on new entry into the blast furnace sector.
• Limiting POSCO’s control over the distribution structure and correcting the company’s exclusionary
distribution practices, particularly Posteel’s operation of an “exclusionary distribution network that
restricts its own sales outlets from handling competing companies’ products.” 57
The KFTC recommendations were not implemented due to opposition by government agencies, including
the Ministry of Commerce, Industry, and Energy. The Planning and Budget Commission interpreted the
recommendations as a “suggestion.” 58 In response to U.S. government questions about the KFTC report as
part of ongoing bilateral discussions, the Korean government clarified:
The Board of Audit and Inspection recommended in June 1998 that POSCO divest its equities in [its
sales] agents, for POSCO’s investment to them is inefficient in the Board’s judgement, considering
its small return. POSCO has agreed to do it step by step. …The Korean Government decided
against splitting up POSCO into two separate companies because it would not be economically
viable to do so. The government further considered concerns over monopolization to be addressed
with the elimination of POSCO’s interest in the domestic distributors, low tariff rates which are
scheduled to be reduced to zero and the proximity and capacity of the Japanese steel industry which
is a significant participant in the Korean steel market. The KFTC report was not binding on
POSCO. Moreover, other independent studies such as that conducted by the Korea Development
Institute recommended against splitting up POSCO because it would reduce the efficiencies of the
company and steel making in Korea. 59
Over the past several years, the Korean government has actively protected POSCO’s dominant position in
the Korean marketplace. For instance, in the mid-1990s, the government discouraged Hyundai from
building an integrated steel plant in order to protect POSCO’s dominant position. 60 Hyundai had planned to
construct an integrated blast furnace plant, mostly for the company’s own steel requirements. According to
industry sources, Hyundai wanted to rely less on POSCO, in part because of Hyundai’s need for
specialized products. 61 In 1996, the KFTC cited this example as evidence of the existence of “tacit
restrictions to entry” into the blast furnace sector. 62
How POSCO Weathered the Crisis
During 1998, POSCO’s dominant position appears to have helped it weather the effects of the Asian
financial crisis much better than Korean mini-mills. This is strikingly evident when contrasting the position
of POSCO with that of the mini-mills in both the domestic and export markets in 1998.
Domestic Sales. Prior to and during the Asian financial crisis, POSCO’s sales mix (domestic vs. export
sales) remained fairly stable, with no major shift between domestic and export sales. However, from 1997
to 1998, POSCO’s share of domestic sales of finished steel by all Korean producers surged from 54
percent to 70 percent. While POSCO’s domestic sales declined 7 percent (1.2 million MT), other Korean
producers’ domestic sales tumbled 53 percent (from 16 million MT in 1997 to 7.6 million MT in 1998). As
a result, these producers’ share of total domestic sales by Korean producers fell from 46 percent in 1997 to
30 percent in 1998 63 (Chart 3-33).
Export Sales. Korea’s finished and semifinished steel exports are the mirror-image of the domestic
situation among Korean producers. POSCO’s exports of finished and semifinished steel increased nearly 14
percent in 1998 (slightly more than 1.2 million MT). 64 While this may seem like a significant increase, the
exports of other Korean producers of finished and semifinished steel increased by more than 200 percent
(more than 4.6 million MT). 65 Exports of these producers (excluding POSCO) increased from 20 percent of
total exports in 1997 to 40 percent of total exports in 1998.
Chapter 3: Behind the Crisis—Korea 93