For the best part of a decade, Australia has benefited from strong growth in trade with the Republic of Korea that would, had it not been for the enormous capital trade and investment of Chinese state-owned enterprises (SOEs) and, to a lesser extent, Indian investors, have been the talking point of commerce in the region.
Led by the resource and agriculture sectors, two-way trade between Korean businesses and Korean SOEs and Australia has grown by eight per cent per annum since 2007. During that period, Australian exports were the primary source of growth, driven by raw minerals such as liquefied natural gas (19 per cent annual growth), beef (22 per cent annual growth) and petroleum products (10 per cent annual growth). Counterbalancing this demand was a decline in coal exports of 15 per cent, due principally to the decline in demand for thermal coal, which currently makes up 82 per cent of all coal exports to Korea. Looking forward, a number of analysts expect a further decrease in thermal coal export to Korea driven by falls in supply, due to natural disasters in Queensland and an increase in demand from Japan, following recent natural disasters affecting alternative energy supplies.
Underscoring the continued growth in trade of resources and agriculture commodities between Korea and Australia is the recent boom in education services (growing by 15 per cent annually since 2007). Not only is Australia’s quality of education seen to lead the region and be of world-class standard, a number of state-sponsored surveys suggest that quality of life is a major drawcard for Korean students.
“...by moving towards an FTA with Australia, Korea has an opportunity to receive improved terms of trade, such as reduced tariffs, increased market access to sensitive goods and services and legal and regulatory co-operation”
The strong growth in trade has however been accompanied by subdued direct foreign investment (DFI) in Australia by Korean investors and SOEs since 2006. In calendar year 2008–09, applications to the Foreign Investment Review Board from Korean investors and SOE fell to A$350m from A$716m in 2006–07. Similar falls in the value of applications were also experienced with respect to investors and SOEs from the United States, Germany and Singapore, though none as dramatic as that posted by Korea.
The focus of investment by Korean investors into Australia has traditionally been the acquisition of off-take rights to resources and supply agreements with respect to agricultural commodities. For the past decade, the growth in demand from Chinese SOEs and Indian investors had increased competition in those sectors to the extent that many investors began investing directly by way of equity in the form of minority interests in the various entities that discover, grow or breed exportable assets.
DFI through acquisition of minority equity has been a common form of investment in Korea for many years and Korean investors and SOEs have recently applied that strategy in Australia in an effort to remain competitive and secure assets. This was exemplified when Korean SOE, KOGAS, entered into an agreement with Chevron Australia to acquire a minority interest in the Wheatstone Gas Project, one of Australia’s largest resource projects situated on the coast of Western Australia. As part of the acquisition, the Wheatstone Gas Project will supply KOGAS with 1.5 million tonnes of liquefied natural gas over a 20-year period and KOGAS will acquire a five per cent equity interest in the project
Recently, competition for assets, driven primarily by Chinese SOEs and Indian investors, transitioned the preferred investment strategy of DFI to majority or full equity ownership. Korean investors and SOEs are yet to fully embrace this strategy, though a number of recent deals suggest a possible shift in this approach.
In 2010, Korea’s National Pension Plan (NPP) acquired iconic Sydney CBD property Aurora Place for A$685m. Soon after, the NPP committed to the establishment of an investment fund to be managed by the United States-based Prudential Financial, which would have an enterprise value of US$1 billion and focus on the acquisition of real property in Australia, China and Japan. The NPP, with A$271 billion in assets under management, has predicted that by 2015 it will grow to A$400 billion under management, of which no less than 20 per cent will be invested in foreign destinations.
Also in 2010, the Korea Electric Power Corporation (KEPCO), together with the Pohang Iron and Steel Company (POSCO), acquired a portfolio of five coal mines in Australia for A$580m. As part of the transaction, Cockatoo Coal Limited, an Australian listed coal mine manager and investor with substantially Korean members including KEPCO, POSCO and SK Energy (Korea’s fourth largest conglomerate), will manage the mine and take a key stake in the venture.
On the regulatory front, by moving towards an FTA with Australia, Korea has an opportunity to receive improved terms of trade, such as reduced tariffs, increased market access to sensitive goods and services and legal and regulatory co-operation with respect to items such as country of origin regulations and financial services reform.
In an effort to financially support private enterprise, Korea has also developed the Export-Import Bank of Korea (Korea Eximbank), to provide state support to private Korean companies that are seeking to invest abroad. As part of the support, Korea Eximbank provides export loans, structured trade finance and guarantee programs to Korean enterprises conducting overseas business. The Bank also provides overseas investment credit, natural resources development credit, import credit and information services related to business opportunities abroad. Since the Global Financial Crisis, Korea Eximbank has made a concerted effort to support foreign expansion as evidenced by recent loans (US$325m) to POSCO in support of its bid for a stake in a leading Brazilian resources firm.
The rise of the BRIC economies (Brazil, Russia, India and China) as world economic powers is a supply-side issue that many investors and SOE have begun and will continue to face for the foreseeable future. The incredible demand for assets, principally resources and agriculture, from the new superpowers has placed substantial pressure on the cost and availability of goods. Korean investors and SOE have begun to adapt and respond to the shifting field of play by showing a willingness to commit to DFI into Australia in typical Korean fashion, with considered enterprise and ingenuity.