Plant utilization ratio falls sharply

SK Group chairman Sohn Kil-Seung used to say at meetings with industry leaders that corporations need to work together to tackle the economic difficulties faced by the nation. His remarks are intended to avoid cutthroat competition among domestic companies through voluntary adjustment of output. It means that the domestic market isn't good at the moment.

The core businesses that lead the nation's manufacturing industry are automobiles, shipbuilding, synthetic fiber, steel, machinery, construction, petrochemicals and semiconductors. Except for shipbuilding, which already has secured enough workload, all industries are projecting slow business.

It is because they excessively expand their manufacturing facilities without an accurate prediction for demand. As demand shrinks abruptly, most businesses are suffering from massive losses.

The petrochemical industry has begun voluntary reduction of output, and other industries such as steel and synthetic fiber are experiencing difficulties with growing stocks. The steel industry is faced with shrinking demand, as the domestic construction business is hit by prolonged slump. Domestic demand for H-shape steel bars and steel pipes is only 60 percent of what domestic steel mills produce.

Synthetic fiber businesses, which narrowly avoided the liquidation of insolvent companies announced in early November, also will suffer from a chronic glut. Prices for raw materials increased by nearly double since last year, but they are unable to raise prices, as they are faced with strong challenges from Chinese competitors that offer low-price products.

The domestic production capacity of petrochemicals is 4.8 million tons based on ethylene, which far exceeds domestic demand of 2-3 million tons. An official of Hanwha Chemical said that the situation is serious, saying that winter is supposed to be a high season for the industry but the manufacturers have to idle production facilities due to slow demand.

If the current status of reduced operation continues, manufacturers will be able to cut their purchase of raw materials, and as a result their stocks will decline. However, it might result in a sales reduction that could hit hard their cash flow. A large number of companies are unable to issue corporate bonds for more than a year now along with suspension of fresh loans from domestic banks. In addition, their existing loans are not rolled over.

"Most Korean companies have so far been sustaining their operation with the money they earned through marketing activities," said Kim Seok-Joong, head of Economic Research Division of the Federation of Korean Industries. "If they reduced their factory utilization ratio because of worsening profitability, it is likely that some marginal firms will go bankrupt."

Analysts point out that the fundamental reason for such a phenomenon is that they failed to sharpen their international competitiveness.

"Companies neglected technology development, as they were busy to tackle problems associated with the foreign exchange crisis," a researcher at Samsung Economic Research Institute said. "So they handed over the domestic market to foreign firms, and at the same time they are being kicked out from the export market."

A research fellow of the Korea Economic Research Institute warned that it is an extraordinary matter because production cuts due to reduced demand for consumer goods will result in weakening the overall economic fundamentals.

"When the economy is in bad shape, it is necessary to look for a new engine of growth through relaxation of regulations," the researcher said.

Park Won-Jae parkwj@donga.com