April 13, 2017 10:00 am JST

South Korea's export recovery is on thin ice

Tensions with China, manufacturing slump bode ill for sustained upturn

JOYCE HO, Nikkei staff writer

A truck driver checks a shipping container at Incheon port in South Korea. © Reuters

HONG KONG Despite a sustained rebound in exports since November, South Korea's manufacturing ended the first quarter with even more contraction, thanks to a souring relationship with its biggest trading partner China and political uncertainty at home.

The Nikkei South Korea Manufacturing Purchasing Managers' Index dipped further to 48.4 in March from 49.2 the previous month -- marking its eighth consecutive month of decline. A figure above 50 indicates expansion, while anything below signals deterioration.

The main drag on the index came from a more pronounced shrinkage in output against falling orders at home and abroad since June. According to London-based IHS Markit, which compiled the survey, some companies noted their sales to China, which buys a quarter of South Korea's exports, had been upset by political tensions surrounding Seoul's deployment of the U.S.-made Terminal High Altitude Area Defense system as China's economic retaliation escalated.

More alarmingly, companies in the beleaguered country were axing staff at the most drastic clip since December 2008 -- the sub-index slipped to 47.2 last month -- while hiking prices of their goods at the quickest pace since April 2011 in the face of higher raw material costs.

Young Sun Kwon, senior economist at Nomura International, explained in a note on April 4 that the inferior performance of South Korea's PMI, especially compared to its trading partners, which are generally in uptrends, was attributable to the relative weakness in its shipbuilding and automobile sectors.

"These two sectors, which have high multiplier effects on other manufacturing sectors, face strong competitiveness headwinds," said Young, noting that the country's largest automaker, Hyundai Motor, continued to see losses in its global market share, and the top three shipbuilders -- Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering -- only met 31% of their sales targets last year.

IHS Markit's senior economist Paul Smith expects the country's industrial growth to trend towards zero and provide minimal contribution to economic growth in the first quarter. But Joseph Zveglich, director at Asian Development Bank's macroeconomics research division, pointed out that the country will likely bottom out this year and return to higher growth the next as fallout from the impeachment of the country's former President Park Geun-hye recedes.

ASEAN UPTURN Supported by a revival in exports, Southeast Asian economies, except for Malaysia, all registered expansion in their manufacturing sectors. The Nikkei ASEAN Manufacturing PMI rose to 50.9 as production increased at the fastest rate since July 2014. Vietnam was the best performer, with its PMI hitting a 22-month high of 54.6, followed by the Philippines, which registered robust new orders to mark a PMI of 53.8.

"The export recovery has coincided with a rebound in import growth in China and the U.S. ... alongside the resurgence in global commodity prices," said Bank of America Merrill Lynch in a note on March 24. "There has also been a pick-up in export volumes across the region, albeit in a less synchronized fashion."

The U.S. bank believes a continued improvement in export prices will be crucial to sustaining the improvement seen so far, especially in the areas of electronics, mining, oil and gas, agriculture, and services. But the lack of capacity pressure -- indicated by lower backlogs despite the drop in employment -- and rapid rise in input costs bode ill for the region's manufacturers, said Bernard Aw, an economist at IHS Markit.

Asia300

Hyundai Motor Co., Ltd.

South Korea

Market(Ticker): KRX(005380)
Sector:
Industry:
Consumer Durables
Motor Vehicles
Market cap(USD): 33,384.4M
Shares: 285.47M
Asia300

Hyundai Heavy Industries Co., Ltd.

South Korea

Market(Ticker): KRX(009540)
Sector:
Industry:
Producer Manufacturing
Trucks/Construction/Farm Machinery
Market cap(USD): 11,020.3M
Shares: 76M
Asia300

Samsung Heavy Industries Co., Ltd.

South Korea

Market(Ticker): KRX(010140)
Sector:
Industry:
Producer Manufacturing
Trucks/Construction/Farm Machinery
Market cap(USD): 3,701.56M
Shares: 390M
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