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Construction, Service and Energy Industries
in Korea
Construction and Engineering
The construction, plant and engineering industries have
consistently enjoyed a growth rate of more than 10 percent since 1990, sometimes
reaching a high 20 percent. These industries have produced more than 13 percent
of the gross domestic product (GDP) since 1990. Recently, however, the
industries have been faced with hard times due to the advent of the economic
crisis and the Korean government's imposition of a strict adjustment program.
Basically, most of the demand for the products from these industries depends
upon domestic orders, which have been greatly cut in line with the current
arduous economic situation. Moreover, the industries have been more seriously
influenced than other industries, such as manufacturing or service industries.
In 1997, the domestic business conditions for the
construction, plant and engineering industries were mainly led by the public
sector, especially due to the increase in the government spending for
infrastructure facilities. However, the stagnancy of business activities in the
real estate and building markets depressed the private construction market. In
particular, the demand for industrial and commercial buildings has greatly
decreased recently. The growth rate of orders for residential buildings has also
decreased. Furthermore, the private construction market became more sluggish due
to the economic slump, which was directly caused by a sequence of bankruptcies
of large companies such as the Hanbo and Kia business groups.
Compared to the sluggish domestic construction market, the
contract volume of the overseas construction in 1997 was more than US$14
billion, which is the highest record in the history of Korean overseas
construction. This was mainly due to the increase in the demand of developing
countries in the Asian region for large-scaled infrastructure facilities. In
spite of financial crisis in the Southeast Asia region, the contract volume from
the region has increased more than 30 percent compared to the previous year.
Currently, the stagnancy of business activities for the
construction market continues as with that of the real estate market. In
particular, the prices of real estate in the Seoul metropolitan area are in a
state of decline, leading the rental business into a deeper depression.
Consequently, compared to the previous year, the level of orders from the
private sector is estimated to have decreased by more than 25 percent in 1998.
Even in this period of adjustment and restructuring, however, the level of the
orders from the public sector is expected to be maintained the same level as
1997.
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Service Industries
Financial Service Sector
Since the turn of the year, Korea has kept its commitments to
the International Monetary Fund (IMF) by implementing the agreed to financial
and industrial restructuring measures. Although painful, the reforms are
necessary to enhance the competitiveness of industries and improve the nation's
international credit standing. Some of the financial sector reforms are
described below.
Sixteen merchant banks out of 30 were either closed or
suspended by the Korean government based on the evaluation of rehabilitation
plans and their ability to achieve minimum Bank of International Settlements (BIS) capital adequacy ratios. It is expected that a few good merchant banks
will be transformed into investment banks through M&A among merchant banks
and other domestic and foreign financial institutions. The merchant banks not
able to be transformed into investment banks shall become mutual savings and
finance companies or shall specialize in a particular business, such as leasing
business, credit card business, or fee-based businesses, such as investment and
management consulting.
For the commercial banks, The government recapitalized Korea
First Bank (KFB) and Seoul Bank (SB) and took effective control by writing down
the equity of existing shareholders. Outside experts were also appointed to
assist a Privatization Committee in privatizing the two banks effectively. The
Korean government expects to obtain bids for KFB and SB by November 1998. Along
with the ongoing privatization program by the Ministry of Finance and Economy (MOFE), the Financial Supervisory Board
(FSB) will coordinate and monitor the
commercial bank restructuring. FSB would require the commercial banks with BIS
capital adequacy ratio below 8 percent to submit their recapitalization plans.
The recapitalization plans are supposed to specify a clear schedule to meet
capital adequacy standards within a time frame of six months to two years.
One of the major restructuring procedures under consideration
for the Investment Trust Companies (ITCs) is to divide them into two separate
entities, namely, an investment management company (IMC) and a securities
company (investment trust securities company, ITSC). Being transformed into
securities company, the ITSC will enjoy additional revenues from brokerage. By
keeping the ITSC only responsible for distribution and redemption of trust
certificates and by not allowing the ITSC to borrow from the trust funds without
the permission of the IMC will build a stronger separation between the trust
account and the account belonging to the ITSC. The Korean government and
investors are seeking to induce foreign capital to participate into the
investment trust business. It is hoped that this will play an important role in
the restructuring process.
It is expected during 1998 that the Financial Supervisory
Board may streamline polices for the 18 life insurance companies in need of
recapitalization. This could be done through M&A or in some case the
establishment of a single bridge insurance company.
The most important change related to the leasing business is
the easing of entry barriers by switching the previous licensing system into the
current registration system. Market entry will be very free given the minimum
paid-in capital of about US$14 million. Deregulation and the reduced entry
barriers will intensify competition within the leasing industry. The leasing
industry, however, will grow towards an advanced stage with the development of
innovative marketing techniques and sophisticated leasing products.
It is known that securities companies confronted huge losses
in the fiscal year of 1997. As the interest rate jumped up and the Korea
Composite Stock Price Index (KOSPI) slid down toward the end of 1997, securities
firms suffered from losses in proprietary tradings. Presently, many companies,
including foreign firms, are preparing to enter the newly liberalized securities
business. As the domestic securities business gets more competitive, the
commission income is likely to fall, causing the demise of cost-inefficient
securities companies.
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General Service Industries
In general, the services industries are highly dependent on
domestic demand rather than exports. Consequently, without the ability to offset
slacking domestic demand by increased exports, the impact of the economic crisis
in 1997-1998 on this industry has been very harsh.
In the advertising industry, total sales dropped by 19 percent
in 1997 and are forecast to plunge further to negative 44.4 percent growth this
year as a result of deep recession and the overall restructuring of industries.
Corporate restructuring, increased M&A, the
internationalization of accounting standards, and other factors will lead to the
expansion of the domestic market for accounting and consulting services.
The domestic legal services market is shrinking due to
client's austerity plans in the wake of the currency crisis. There are signs of
a temporary oversupply of lawyers as the total quota for lawyers has increased
considerably since 1993. From this year, however, the demand for corporate legal
services will heighten as M&A, corporate disputes, and lawsuits over
financial issues will increase. At the same time, the market opening in legal
services will accelerate and competition will intensify. Consequently,
businesses in legal services will become larger and/or more specialized.
One half of the total trade volume in Korea is handled by the
seven largest general trading companies. These trading companies are also
suffering from a liquidity shortage and the overhaul of the manufacturing and
services business structures. Prospects of the trading companies is quite
positive, despite some setbacks, by virtue of the large number of experienced
and trained workers they employ. Korea's geographic situation-being close to
China and Japan-is highly advantageous and accentuates the nation's potential to
become a logistics and trading hub in the East Asian region.
In the retail and wholesale industries, the growth in sales of
department stores and small stores is rapidly shrinking due to the recession.
The sales of large discount stores, however, will take up the slack by a 50
percent or more increase in growth this year. Since the retail and wholesale
industries have been severely influenced by the ongoing market opening, a
thorough structural change is expected in these industries.
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Energy Industry
Domestic energy production as of December 1997 totaled 2,297
thousand TOE, a 17% increase from that in 1996. Nuclear power generation
increased by 18.2%. When Wolsong No. 2 nuclear power
plant started operation in July 1997, the number of nuclear power facilities in
Korea reached 12 plants. Meanwhile, anthracite production decreased by 2.9%.
Hydroelectric power generation and renewable energy increased by 31.0% and
14.9%, respectively, but the share of the hydro and renewable energy is small in
the area of energy production.
Total primary energy consumption as of December 1997 was
17,749 thousand TOE, which increased by 2.8%, compared to the size of the
previous year. In the meantime, final energy consumption in 1997 increased to
14,691 thousand TOE, 4.1% higher than the previous year.
Energy consumption in residential and commercial sectors
recorded 4,567 thousand TOE, which showed an increase of 0.7% rate. Energy
consumption in public and other sectors was 311 thousand TOE in 1997, down 9.5%
from the previous year. The oil consumption in the industrial sector increased
by 12.6%, and electricity and town gas consumption increased 5.6% and 12.9%,
respectively. Coal consumption increased by 5.1%. However, in residential and
commercial sectors, coal has been substituted by clean energy, such as town gas
or electricity.
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Electric power
In the 1960s, Korea's electricity generation principally
centered around domestic coal-fired (anthracite coal) and hydropower plants. Oil
became the next source of electricity generation due to its relatively cheap
price. By 1977, dependency on oil reached 89.35 percent. However, since the oil
shock in 1973, the power development strategy of Korea has shifted toward
nuclear power. The purpose behind the new policy is to lessen the vulnerability
caused by the unpredictable supply and price of oil.
The era of nuclear power and bituminous coal begun with the
recommissioning of the Inch'on Thermal Power Plant,
which changed its fuel source from heavy oil to both oil and LNG. The government
and KEPCO (Korea Electric Power Corp.) also began to embark on a policy to
achieve efficient use of generating resources and diversification of fuel-type
generating capacity.
By diversifying fuel resources, a new trend is beginning to
emerge. There was an increased use of nuclear and coal (bituminous), which are
the least expensive source of fuel, as well as a reduction in the use of the
domestic coal, which is low in quality, and heavy oil.
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Supply and Demand
Along with the recent trend of economic growth, electricity
demand is also rapidly growing. Korea is setting up a 15-year Long-Term Power
Development Plan to cope with demands. Electric power authorities also
anticipate that electricity demand will grow 8.5 percent (per annum) from 1995
to 2010. Estimates for sales volume is 239.3 billion kWh in 2000, 305.9 billion
kWh in 2005, and 365.6 billion kWh in 2010. The peak demand is forecasted to be
43,559MW in 2000, 55,670MW in 2005 and 65,642MW in 2010.
According to the Long-Term Power Development Plan (1995-2010),
electric power authorities plan to maintain an optimum capability reserve ratio
of 18-20 percent after 1998. It also forecasts that electricity demand and
supply at that time will be stabilized. The composition of installed capacity
mix in 2010 will be 26,330MW (33.1 percent) nuclear, 21,700MW (27.3 percent)
coal, 22,010MW (27.7 percent) LNG, 3,530MW (4.4 percent) oil and 5,980MW (5.5
percent) hydro and others.
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Power Generation
In 1997, the composition of electricity generation included a
mix of nuclear fuel (34.3 percent), coal (28.1 percent), oil (17.2 percent),
LNG(14.2 percent), hydro (2.4 percent) and domestic coal (1.8 percent). The
composition of electricity generation for 2001 confirms this trend; 70 percent
of the total generation will come from nuclear and coal energy. The portion of
LNG generation is to be increased from 13.1 percent in 1996 to 15.4 percent in
2001. This is due to the strengthening of environmental regulations which have
encouraged the use of clean energy resources and highly efficient combined cycle
power plants.
With the successful completion of Poryong
Units 3-6, and Taean Units 1,2, the era of supercritical boilers has been
launched. These units, with main steam pressure of 246kg/cm2, have a
rapid start-up time, high load-following capability and high thermal efficiency.
These features reduce the unit costs and are well suited for daily start-ups and
shutdowns which further contribute to the stable supply of electricity. In
connection with the Satellite Cities Development Plan promoted by the
government, KEPCO operates four LNG/combined cycle power plants in four
satellite cities to supply electricity and heat. The combined cycle power plants
in Anyang and Pundang begun their operation in October 1992. The Ilsan and
Puch'on plants began operations in October 1993. The total capacity of these
four plants is 2,705MW. The total heat supply capacity for KEPCO is 1,998Gcal/h
and 1,284Gcal/h for Korea District Heat Co. with a total of 3,282Gcal/h, serving
491,000 households in these new cities. Moreover, the total capacity of the
combined cycle power of Seo-Inch'on Power Plant,
established in November 1992 and located just 20 minutes from Seoul, is 3,080MW.
It achieved one of the highest thermal efficiency rates of 45.9 percent and the
lowest discharge of NOx of (50PPM).
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Transmission and Substation
Transmission and substation facilities are responsible in
transmitting large power from the power plants to the demand site. Total
transmission line length as of December 31, 1997 has reached 24,254 C-km,
including underground transmission line 834 C-km. The number of substations is
400, including 166 unmanned substations. The total transformer capacity is about
96,160MVA.
Korea's transmission system voltages mainly consist of 345kV
and 154kV. KEPCO is now constructing 765kV facilities (three transmission lines,
four substations), which are expected to be in operation by 2001. It is hoped
that they will transmit large power supplies stably as well as solve the
maldistribution problem between large power plants and the demand area which has
arisen from the rapid power demand increase in Seoul.
The power system of Chejudo island linking to the mainland is
currently being established to enhance the power systems' stability as well as
reduce the electricity generation cost in Chejudo island. An HVDC (High Voltage
Direct Current) system was constructed in November 1997, with a DC + - 180kV and
300MW submarine cable 101 kilometers 2 circuit connecting Chejudo island and
Haenamgun country.
Due to the rapid increase in size and complexity, T&S
facilities must be supervised, protected and controlled automatically. KEPCO is
actively implementing a TFTS (Trouble Free of Transmission & Substation)
program to improve facilities and prevent human errors. The duration of outage
and fault will be reduced dramatically in order to improve the quality of
electricity.
KEPCO will also introduce on-line supervision and diagnosis
system for T&S facilities; it is also developing new techniques, such as
IDPCS (Integrated Digital Protection and Control System) and the APRS (Automatic
Power Reconfiguration System) to improve quality. The most vulnerable power
system facilities are currently being replaced and scientific prognosis
equipments have been introduced to increase the system's reliability. The
Decentralized Client/Server system has been adopted by the T&S system which
will be linked with TGIS (T&S Geography Information System), OA and SCADA
computer system. Integrated CAD drawing management systems will also be
established soon.
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Power Distribution
Reductions in power failure time is crucial to achieving a
truly global information society. KEPCO has introduced equipment that has
drastically reduced power failures. As a consequence, 295 power failure minutes
in 1990 has greatly been reduced to fewer than ten minutes in 1997, resulting in
the improvement of national trade competition in the world market. The goal is
to reduce the power failure time down to under just few minutes by providing
perfect electrical cable work.
The essential goal of the power distribution system is to
supply electricity without power failure. To achieve this goal, the present LOOP
mode will be replaced with the SPOT-NETWORK mode and the REGULAR-NETWORK for the
customers who need high voltages. KEPCO is planning to install the
REGULAR-NETWORK mode for the power distribution system with the aim of
commercializing it by the early 2000s. Also, a robot for the electrical cable
work will be built and it will be ready to be put in operation by 2010.
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Rates
The current rates are being stipulated by the sector of use:
residential, commercial, educational, industrial, agricultural and
street-lighting. Residential has a seven-phased progressive rating system to
support the low-income class and to stimulate self-control of energy saving.
Seasonal and TOU (time-of-use) rating system are put in effect in order to
disperse load around the clock for the commercial and industrial sector.
For the past decade, the consumer price index has been rising
by 80 percent. Meanwhile, the residential rate of electricity has risen by just
2 percent. While the producer price index has risen by 31 percent, the
industrial rate, by contrast, has fallen by 11 percent. The average unit price
of electricity in 1996 turned out to be 4 percent lower than that of 1986. This
average exceeded the reduction rate of the total cost, 1.4 percent. Such results
are obtained by the steady increase of nuclear power generation and managerial
efficiency.
The price level has thus been kept at a relatively lower rate
compared with those of the major developed and/or competing countries, except
for the United States. Despite the fourfold increase of the GNP which has led to
the rapid and general improvement of living standards in Korea during the last
10 years, the proportion of electricity household expenditure has decreased from
1.7 percent of 1986 to 1.25 percent of 1995. Electricity cost ratios for the
manufacturing industry sector have also decreased, from 2.2 percent of 1986 to
1.72 percent of 1995. It is generally believed that the low rate of electricity
generation has greatly contributed to price stabilization and industrial
competitiveness of Korea.
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Coal Mining
Anthracite is Korea's major coal resource, and as no liquid
energy resources have been yet discovered and hydraulic energy resources are
poor, anthracite has been the major energy resource in Korea. It was only since
the 1960s that its exploitation was begun in earnest. In order to meet the sharp
increase in energy demands due mainly to the rapid industrialization during that
period, the government took a series of measures to promote coal production. The
promulgation of the provisional Coal Development Law in December 1961, which
merged small private coal mines into one large conglomerate, was just one of
these measures.
As a result, the coal mining industry made great progress in
all aspects during the first half of the 1960s. The number of mines in operation
increased from 131 in 1960 to 177 in 1964; employment figures during this period
also increased, from 24,661 to 37,047. Output increased to 12,436,000 tons in
1967, about double of 1962's output.
The coal mining industry, however, began to show a decline
during the latter half of the 1960s because coal production was unable to meet
the rapidly increasing demands for energy. Thereafter, the government adopted a
new energy policy calling for the substitution of anthracite for oil.
After the first oil crisis in 1973, however, the government
was forced to reconsider the coal industry, and offered subsidies and tax
exemptions to spur the development of coal energy. Output of coal then increased
by 10 percent per year from 1973 to 1975. Production in 1975 totaled 17.6
million tons, much greater than demand. From 1977, however, demand for coal has
increased each year; the production of 18.2 million tons in 1979 did not meet
domestic demand.
In 1980, as the consumption of petroleum products decreased,
the production of 18.6 million tons of coal also failed to meet demands; 2.7
million tons of anthracite were therefore imported in 1980. Since the second
half of the 1980s, the demand for coal has decreased rapidly due to a drop in
oil prices. As a result, the share of coal in total energy consumption dropped
to 2.0 percent in 1995, from 21.9 percent in 1985. When the international oil
market is volatile, coal development is pushed more vigorously to minimize
dependence upon imported energy sources. Government loan funds were offered
through the Korea Mining Promotion Corp., and financing was made available for
coal stockpiling during the off-season to avoid price fluctuations.
The coal mining industry is a typical labor intensive industry
in which labor costs comprise nearly 50 percent of the total cost. The number of
employees in the coal mining sector was about 10,725 in 1996. The wage level of
the miners is comparatively high. In recent years, however, miners are leaving
their jobs each year because of the risky and difficult nature of the work.
In an aftermath of the first and second oil crises, the
importance of energy self-sufficiency was fully recognized, spurring domestic
coal development. Accordingly, the government decided to continue the structural
adjustments of local industry due to insufficient indigenous resources and the
diminishing price advantage of coal against oil energy. The government also
plans to support the development of large-scale remunerative coal mines while
encouraging the shutdown of economically unprofitable smaller ones.
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Oil Refining
The oil refining industry in Korea was launched in 1964 with
the completion of a joint venture facility in Ulsan between the Korean
government and the Gulf Oil Co. of the United States. This refinery, Korea Oil
Corp. (now SK Corp.), went into operation with an initial capacity of 35,000
barrels per stream day (BPSD).
With the completion of the First and Second Five-Year Economic
Development Plans, petroleum demands skyrocketed. The increase in petroleum
demand forced the construction of four more refineries. Kukdong Oil Refinery
(now Hyundai Oil Refinery) was built with 100 percent Korean capital and came on
stream in 1966.
Three more joint venture refineries with foreign oil companies
have been constructed since then: Honam Oil Refinery Co. Ltd. (now LG-Caltex Oil
Corp.), a partnership between the Caltex Petroleum Corp. of the United States
and the Lucky Group which went on stream in 1969; Kyung-In Energy Co. Ltd. (now
Hanwha Energy Co. Ltd.), a subsidiary of the Korea Explosives Group, and the
Unoco Ltd. of the United States in 1971; and finally Ssangyong Oil Refining Co.
Ltd., originally incorporated under the name of Korea-Iran Petroleum Co. Ltd. in
1980. Ssangyong Oil Refining Co. Ltd. is a joint venture between Ssangyong
Cement Industrial Co. Ltd. and the National Iranian Oil Co. (NIOC). Of these
five refineries, LG-Caltex is still affiliated with Caltex, and Saudi ARAMCO
joined Ssangyong's oil refinery in 1991. Five refineries now are in operation
and their total capacity as of the end of 1997 is 2,520,000 BPSD, which is 70
times more than that of 1964.
Total production of petroleum products increased from 4.8
million barrels in 1964 to 881.1 million barrels in 1997. Until the middle of
the 1970s, Korean refiners were unable to meet domestic demands for fuel oil and
petrochemical feedstock. Following the completion of the Yoch'on
Petrochemical Complex in 1979, however, they were able to meet the abrupt
increase in demand for naphtha. This resulted in the expansion of the national
refining capacity, from 580,000 BPSD in 1978 to 2,520,000 BPSD in 1997.
Increase in the domestic supply of petroleum products brought
about a drastic change in the pattern of energy consumption. Until the first
half of the 1960s, coal was a major energy source. Domestic coal production
however, failed to meet the increasing energy requirement. Accordingly, after
1967 the government switched from coal to petroleum as the major energy source.
As a result, petroleum accounted for 40.1 percent of the total primary energy
consumption and coal 32.8 percent in 1969, while in 1997, petroleum energy
amounted to 59.3 percent of the total primary energy consumption.
Since 1990, petroleum consumption had posted an average annual
growth rate of 12.5 percent. Yet, after 1993 rising trends of petroleum
consumption have begun showing signs of slowdown. These trends have been
ascribed partly to tightened demand controls under the government's energy
policy, together with efforts to transfer fuel oil to clean energy due to the
strengthening of environmental protection laws, as well as the completion of
expansion projects of petrochemical plants. The total consumption of petroleum
products in 1997 reached 748.1 million barrels, or 11.9 times of 1970. Gasoline,
kerosene, jet fuel and diesel have all played a leading role in increasing
consumption during 1997.
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Alternative Energy Technology
Alternative energy use was 909 thousands TOE in 1995,
consisting 0.61% of total energy consumption. Solar thermal hot-water units and
industrial waste incineration system have been commercialized and are being
disseminated. Energy from waste consists of 87% of total alternative energy use.
Also, certain areas of photovoltaic energy have passed the basic research phase
and entered the utilization stage, as can be seen from the expansion of use of
photovoltaic power systems in small island regions. Medium and large
photovoltaic energy systems do not have economic feasibility when considering
direct energy substitution effects. However, when considering indirect effects,
the periods of investment return have been shortened.
According to 10-Year Development Plan for Energy Technology in
Korea (1997- 2006), alternative energy technology development will provide 2% of
total energy supply by 2006. Korea's alternative energy R&D activities and
dissemination will focus on areas offering substantial possibilities for broad
utilization, such as solar thermal energy, photovoltaic power, fuel cell, and
waste use.
Among 11 alternative technology R&D programs four
high-priority programs are selected. It takes into account the high probability
that the technologies concerned, once developed, will be competitive with
similar technologies in industrialized countries, and that they will contribute
to improve Korea's energy demand and supply structure. The high-priority
programs are solar thermal energy, photovoltaic power, fuel cell, and IGCC.
Other technologies are classified into basic and general technology programs to
promote continued technology R&D. Basic technology programs include research
on basic technology, resources, and the current status of small hydro-power,
ocean and geo-thermal energy. General technology programs include research on
energy from waste, bio-energy, wind power, and coal (excluding IGCC).
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Information
provided by the Korean Embassy
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