Korea exports slip hits three-year low

Blame the 8.8% decline on massive slump in bulk value of ship exports.

According to Morgan Stanely Research, Korea's exports declined 8.8% YoY in July (vs. a gain of 1.1% in June), much lower than consensus forecast of -3.7% and our forecast of -1.7%. It was the biggest decline in three years since September 2009. We believe the weak exports in July were partly due to the decline in the bulk value of ship exports (-57.5% YoY). We estimate Korea's exports excluding ships to have declined 3.2% YoY in July (vs. +0.9% in June).

Here's more from Morgan Stanley:

Imports were also weak, down 5.5% YoY (vs. -5.5% YoY in June). The trade surplus narrowed to US$2.7 bn in July from US$4.9 bn in June. In our view, weaker-than-expected exports in July signified that Korea's export sector was affected by external weaknesses. Initial data showed that exports to Hong Kong, EU and Latin America declined the most.

Exports of ships, handsets, petrochemicals and steel showed the greatest declines: Korea's ship exports declined significantly by 57.7% YoY in July (vs. +3.0% in June), due to the weaker demand for energy-related offshore ships this year after the robust growth in 2011. Exports of handsets declined 34.7% YoY in July (vs. -24.9% in June), in our view partly because Korean manufacturers were moving some low-value-added production lines overseas to benefit from the cheaper labor costs.

Petrochemical, steel and petroleum exports declined 22.3% YoY, 20.2% YoY and 12.2% YoY respectively, due to the weak demand and lower international commodity prices. Automobiles and semiconductors also reported small declines at -5.3% YoY and -1.2% YoY, respectively. On the other hand, exports of computers and LCD were relatively resilient, up 15.7% YoY and 6.7% YoY, respectively.

The weak exports suggest to us that the external demand is deteriorating. Our current GDP forecast for 2012 is 3.2%, and we see downside risks due to the intensified external uncertainties.