South Korea’s new Moon rises - and offers commitment to change

A pledge to break corrupt links between business and government may have long-term implications for the country's shipyards and shipping worldwide

South Korea turned a page this week with the decisive election of 64-year-old liberal human rights lawyer Moon Jae-in as its new president, ending nine years of conservative rule.

His appointment restores a measure of stability to the country after months of chaos that led to the impeachment of his predecessor, Park Guen-hye, over a corruption scandal that exposed cosy ties between the government and major "chaebol" business groups.

Understandably, most worldwide attention will focus on president Moon’s handling of the escalating tensions with North Korea over Pyongyang’s pledge to develop nuclear weapons that are able to reach the US.

Although he has been an advocate of the "sunshine policy" of past left-wing leaders, he is thought unlikely to be a pushover having spent time in Korea’s special forces during his military service.

He was part of a mission that responded after North Korean troops murdered a US soldier in the demilitarised zone between the two feuding nations in 1976.

However, foreigners may be surprised that many of the 41% who voted for him this week are more concerned about jobs, the nation’s stagnating economic growth and the corrupt ties between business leaders and politicians.

As a major importer and exporter, home to three of the world’s biggest shipbuilding groups and the globe's 13th-biggest container line, any policy shifts will have major implications for global shipping markets. The collapse of container line Hanjin Shipping last summer sent shockwaves through global markets.

Moon has pledged already to break what he has termed the collusive ties between the chaebol and government — and has vowed to be incorruptible.

“I take this office empty handed and I will leave this office empty handed,” he said in his first speech to parliament as leader.

He takes residence in the presidential Blue House facing significant economic headwinds. After nine years of conservative rule, growth has slowed to below 3% and inequalities have widened, with youth unemployment at more than 10%.

Chaebol business conglomerates have become more dominant, with combined revenues at the top 10 groups now about two-thirds of gross domestic product.

To address these problems, Moon made major election pledges to create 500,000 jobs and reform the crony capitalism that left his predecessor facing bribery charges. Jay L Lee, Samsung Group’s de facto leader, also faces bribery charges in a case that has been dubbed the "trial of the century".

Alongside general reforms to an inefficient labour market, shipbuilding is among the key industries that will face fresh calls for restructuring.

Some major structural changes are in place already. The world’s biggest shipbuilder, DSME, last month won bondholder agreement for a debt-for-equity swap that unlocked a $2.6bn bank bailout and saved it from the threat of imminent collapse.

The latest bailout — alongside the earlier KRW 4.2 trillion ($3.7bn) one agreed in late 2015 — amounts to Korea’s biggest state-backed rescue of a single company in more than a decade, largely in response to the threat to around 50,000 direct and indirect jobs.

DSME has slashed about 3,000 employees since October 2015 and currently directly employs about 10,400 people — but at least it is now in a position to complete its orders backlog of 108 ships, totalling 6.2 million compensated gross tons (cgt).

Yard employees have agreed to wage cuts to help ensure its survival, as part of DSME's plan to further trim labour costs by about 25% this year to KRW 640bn — about half the level two years ago.

DSME’s two major domestic rivals — Hyundai Heavy Industries (HHI) and Samsung Heavy Industries (SHI) — also are taking measures to cope with the market downturn.

This week, HHI completed its split into four separate publicly traded companies — shipbuilding, construction equipment, electric machinery and industrial robots — with the aim of attracting new investors and strengthening its competencies.

Although the move has halved the core shipbuilder’s net debt and has been welcomed by markets, it has been strongly opposed by its unionised employees, which reflects the tensions that president Moon will face in steering a course between reform and job creation.

Recently, SHI has been successful winning a string of large tanker orders. But with current newbuild prices so low, they will be barely above break-even for the yard.

Restructured yards will require a continuing flow of new orders to ensure their future cash flow, which risks further depressing prices. The unintended consequence and risk for global shipping markets is a surge in speculative newbuildings.

Moon’s lack of a majority in parliament will limit his ability to push through radical business reform in the short term. However, his track record and powerful mandate suggests he will drive change — and that will impact shipping markets globally.