China's Iron and Steel Industry Amid The Financial Crisis: Industrial Markets

I NDUSTRI AL MARKETS
ChinasIronandSteel
Industryamidthe
FinancialCrisis
1
ChinasIronandSteelIndustryamidtheFinancialCrisis
Contents
2 Preface
6 DirectionofChinasironandsteelindustryinanadverseeconomy
10 Upgradingindustrychains
12 ThecruxofthematterIndustrystructures
20 Nextsteptoaddressstructuralissues
28 Difficultiesamidreform
32 Developmenttrends
36 Conclusionchallengesversusopportunities
40 Contactus
This is a translation only. In case of discrepancy, the original version in Chinese shall prevail.
2009KPMG,aHongKongpartnership,isamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved.
2
Preface
PeterFung
Partner-in-charge
IndustrialMarkets
KPMGChina
TheironandsteelindustryisakeypillarofChinaseconomy.SinceChina
introduceditsreformandopeninguppolicyseveraldecadesago,thedomestic
ironandsteelindustryhasachievedexponentialgrowth.In1996,Chinasiron
andsteeloutputexceeded100milliontonnesforthefirsttimeanditbecame
theworldstopproducer.In2008,itscrudesteeloutputof500milliontonnes
rankedChinaasthegloballargeststeelproducerforthethirteenthconsecutive
year.
1
Chinasironandsteelindustryhasalsodominatedindustriessuchasiron
ore,coke,mechanicalmanufacturing,householdelectricalproducts,auto
manufacturing,shipbuilding,andconstruction.
However,theindustryisnowfacingseveralchallenges,notablycontinuousprice
hikesofrawmaterialssuchasironore,increasingcompetitionfromdomestic
marketplayers,andtheexpandingpresenceoflargeforeignsteelcorporations.
Thesehaveexposedsomeweaknesses,includingthefactthattheindustrydoes
nothavemuchinfluenceoninternationaltradesofrawmaterialswhileitsuffers
fromexcesscapacity.Themostcrucialfactorcontributingtotheseweaknesses
istherelativelylowconcentrationoftheindustry.Theremedyliesinself-
adjustmentsoftheindustrystructureinthenearfutureandoverthelongerterm
ashiftinfocusfromsizetostrength.
Asanintegralpartoftheindustrystructureadjustments,themergersand
acquisitions(M&As)ofChinasironandsteelindustryhavegarneredmuch
attentionfromthemarketsincethecountrysfirstDevelopmentPoliciesforthe
IronandSteelIndustrywerelaunchedin2005.
1
China Metallurgical News,19February2009
3
On3September2008,GuangxiIronandSteelGroupCo.,Ltd.wasestablished
inChina.ThegroupwasformedthroughareorganisationofLiuzhouIronand
SteelbyWuhanIronandSteel(Group)Corporationandtheinvestmentoftens
ofbillionofrenminbiaftertheZhanjiangproject.Thismarkedtheemergenceon
thesouthernChinacoastofanothermodern,internationallycompetitiveironand
steelbasewithacapacityof10milliontonnes,whoseproductsconformedto
internationalstandards.
GuangxiIronandSteelGrouphasbeenoneexampleinaspateofM&A
activitiesinChinasironandsteelindustrysince2008.Inprecedingyears,three
othermassiveM&Aprojectshadbeencompleted,withatotalinvestmentof
severalhundredbillionrenminbi.ShandongIronandSteelGroupCo.Ltd.was
formedoutofthemergerofJinanIronandSteelGroupandLaiwuSteelGroup.
HebeiIronandSteelGroupwascreatedoutofthemergerofTangshanIronand
SteelandHandanIronandSteel.GuangdongIronandSteelGroupCorporation
wasformedoutoftheBaosteelGroup-ledmergerofGuangdongsironand
steelindustryandtheZhanjiangSteelBase.Theseprojectsarousedmuchpublic
concernoverthemergingandrestructuringofChinasironandsteelindustry
inrelationtotheirinvestmentsize,futuredevelopmentexpectations,and
considerableimplicationsforindustrychains.
However,thewaveofM&AactivityinChinasironandsteelindustrymay
onlybeinitsinfancy.TheChinesegovernmenthasbecomeakeyplayerin
supportingdomesticM&A,whilemoreprivateenterprisesandforeigninvestors
havebeenparticipating.
4
Chinasironandsteelindustryhasstillnotfullyachievedthegoalssetoutinthe
Development Policies for the Iron and Steel Industryofcreatingtwoglobally
competitivesuper-largecorporations,eachwitha30milliontonnecapacity,and
severalotherseachwitha10milliontonnecapacityby2010.Thisalsomeans
alargermarketandmorecooperativeopportunitiesforthoseentitieswith
competitivestrengthsandinvestmentinsightamidtheindustrysM&As.
Thegoalsremainonthehorizonbecausetheglobalfinancialcrisiswhichhas
affectedtherealeconomiesaroundtheworldhashitChinaanditsironandsteel
industryquitehard.However,followingthelaunchoftheChinesegovernments
RMB4trillioneconomicstimuluspackageinearlyNovember2008,numerous
domesticlarge-scaleworksprojectsarenowreadytoproceed.Thisis
undoubtedlygreatnewsforChinasironandsteelindustry,andrepresents
anotherraregrowthopportunityforitsmarketleaders.Giventhechallenges
andopportunitiesahead,increasingtheleadingsteelmakerscompetitiveedge,
improvingoperatingsystems,andundertakingM&Aarepressingneeds.
Furthermore,pricesoftheworldsmetalproductsincludingironandsteel,
aluminium,andcopperhavebecomehighlyvolatileamidtheglobalfinancial
crisis,withglobalimplications.Managementofcorporationshavefoundit
increasinglydifficulttograspafullpictureoffinancialrisks,whilegrappling
withshorttermsurvival.Toaddressandmitigateriskexposure,corporate
ownersmustthereforeseekandstudythebestsolutionstocontrolthem.The
prevailingfinancialcrisishaspromptedChinesesteelproducerstoraisetheir
consciousnessofriskandtodesignmoresophisticatedsystemsforavoidingor
mitigatingrisk.
WhilewritingadevelopmentreportonChinasminingequipmentsectorinJune
2008,KPMGChinasIndustrialMarketsteammentionedtherestructuringof
thedomesticminingindustryandthegrowingpresenceofforeigninvestorsin
China,factorswhichbearuponChinasironandsteelindustry.Tolearnmore,
KPMGChinacommissionedBeijing-basedChina Metallurgical Newstoprovide
dataandwritethisreport.Thereportaimstofurnishinvestorsandjoint-venture
partnerswithreferencematerialsontheinvestmentenvironmentofChinasiron
andsteelindustry.Thisinformationthough,isnoalternativeforthorough,pre-
investmentduediligence.
5
6
DirectionofChinasironandsteelindustryinan
adverseeconomy
Toughchallenges
Chinasironandsteelindustryhadadramaticyearin2008.Inthefirsthalfof
theyear,theindustryachievedrecord-highproductionandprofitduetoprice
hikesandstrongsales.Undertheinfluenceoftheinternationalfinancialcrisis
aswellasvariousexternalanddomesticfactors,marketpricesslidrapidlyfrom
earlyAugustonwards.Inparticular,theindustryenteredaperiodofvolatility
evidencedbyplummetingproductprices,sharply-reducingproduction,and
dwindlingexports.
Manysteelmakersreliantonexportsincurredlosses,whiletheindustry
generallysufferedinlightofaquickcontractionofdemand.Thesewere
unprecedentedchangesfortheindustryduringtheyear.Coupledwiththefact
thattherewerestillnoapparentchangesinthecontrolofupstreamrawmaterial
resources,weshouldgiveseriousthoughttotheindustrysgrowthdirection
afterseveralyearsofprosperity.
Dramaticchangesinexportmarkets
TheglobalfinancialcrisistriggeredbytheUSsub-primemortgagecrisishas
severelyaffectedChinasrealeconomy,resultinginasubstantialdeclinein
itsexportsandforeigntrade.Amongdirectlyandindirectlyexportedironand
steelproducts,Chinascrudesteelaccountsforabout23percentofitstotal
steelproduction,sothedrasticchangesintheexportsituationhascauseda
considerableshrinkindemandforChinesesteel.AccordingtoChinaCustoms,
thetotalvalueofimportsandexportsinforeigntradeforJanuary2009wasUSD
141.8billion,downby29percentoverthesameperiodoflastyear,withexports
ofUSD90.45billion,downby17.5percent.Duetoslackeningdemandcoupled
withtheimpactofSpringFestivalholidaysinJanuary,Chinasdirectandindirect
ironandsteelexportvolumesfellagainstthesameperiodoflastyear.Chinese
steelexportsforthesamemonthreached1.91milliontonnes,downby53.8
percent.Chinasexportvalueinforeigntradeshrankforthethirdconsecutive
monthsinceNovember2008.ThoughtheChinesegovernmenthadraised
exportrebateratesforthefourthtimesinceAugust2008,exportsofsteel-
consumingproductsstilldropped.
2
2
7
3.6% 3.2%
2.2%
Chart1:Percentagesofcrudesteelconsumptionfortheworldsmajorsteel-
producingcountriesandregionsin2008
4.2%
China
6.4%
Japan
8.1%
Korea
Middle East & India
16.7%
European Union
Commonwealth of
32.2%
5.6%
Independent States
North America
12.1%
South America
Africa
ASEAN
Source:China Metallurgical Newsdatabase
Chinasironandsteelindustryisbecomingincreasinglyexport-oriented.In
2007,10.9percentofcrudesteelproductionwasdirectlyexported,increasing
to11.5percentin2008.InlinewithChinaswidereconomicdevelopment,
steelexportsinforeigntradeaswellasindirectsteelexportsgrew
continuously.
In2007,indirectcrudesteelexportsaccountedfor14.9percentofthe
domesticcrudesteelproduction,lesseningto12.9percentin2008.Direct
andindirectsteelexportsaddedupto25.8percentand24.4percentfor2007
and2008,respectively,withouttakingintoaccounttheimplicationsofChinas
steel-consumingproductexports.Ingeneral,aboutone-fourthofsteelwas
producedforoverseasdemand.Withtheonsetofthefinancialcrisis,Chinas
exportgrowthhasslowed,posingagreaterthreattosteelmarketsrelianton
exportproducts.
3
3
8
Addressingtheriskofincreasinginternationaltradeconflicts,theChinese
governmentloweredsteelexportrebateratesandevenincreasedtariffsseveral
timesinthethreeyearsbeforethefinancialcrisistosuppresstheironandsteel
sectorsexcessiveexportexpectations.Despitethesedisincentives,thesector
wasstillluredtowardsoverseasmarkets,achievinganannualexportgrowthrate
ofabout10percentinconsecutiveyears.
However,thecurrentfinancialcrisishasadverselyaffectedChinasironand
steelexports,leadingtodownwardadjustmentstoallanalyticaldatasuchas
economiccomparativefigures.Adrasticreductionofoverseasdemandforiron
andsteelisseenasakeycontributortopoorsteelexportresults.
Ailingdomesticmarket
Chinasmajorsteel-consumingsectors(automobiles,property,andshipbuilding)
havealsoshrunksignificantly.Inthefourthquarterof2008,somekeysteel-
consumingsegmentsreportednegativegrowth,resultinginshrinkingdemand
fordomesticsteelinboththethirdandfourthquarters.
Accordingtoaresearchstudy,54-55percentofChinassteelwasconsumed
byconstructionandtransportation,38-39percentbyindustrialproduction,
andaround8percentbyagriculture,forestry,animalhusbandry,andrelated
industries,aswellasnationaldefenceandmilitaryindustries.Forindustrial
production,about66percentofsteelwasconsumedinmanufacturing
machinery,automobiles,andagriculturalvehicles,withabout34percentbeing
usedinindustriesofships,householdelectricalappliances,metalproducts,
metalpackaging,oilandpetrochemicals,power,andcontainers.Accordingtoan
initialestimation,Chinassteelconsumptionlevelhas,underthefinancialcrisis,
droppedbyapproximately20milliontonnesoverthesameperiodoflastyear,
andabouttwo-thirdsofthereductionisattributabletofallingdemandforsteelin
industrialproduction.
4
Sectorprofiles
In2008,Chinasestablishedmachinerysectorexpandedby17.1percentyear-
on-yearintermsofindustrialvalue-added,whileitsgrowthrateanddelivery
valueofexportsslowedby7percentand15.2percentrespectively.
5
Except
forpowergeneration,cementequipmentandconcretemachineryforusein
construction,manykeymachineryproductshavesufferedgrowthslowdown
inmonthlyproductiontovaryingdegrees.IftheChinesegovernmenthadnot
introducedanincentivepolicyforpromotingitsuseinruralareas,agricultural
machineryproductionmighthavedroppedevenmoresharply.
AutomobilemanufacturinghasbecomeakeyindustryinChinaseconomy,
withgrowinginfluenceoversteelconsumption.In2008,domesticautomobile
productionreached9.62millionvehicles,up6.5percent,butitsyear-on-year
4
5
MinistryofIndustryandInformationTechnologywebsite,1February2009
9
growthslowedby16.4percent.Luxuryautoproductionstoodat5.33million,up
7.8percent,butitsyear-on-yeargrowthslowedby17.2percent.
Chinasautomobileexportshavebeenontheriseinrecentyears.In2008,
exportssurgedby11.1percent,butgrewslowerthan2007,downby67.85
percent.FinishedautomobileexportsdroppedbetweenAugustandDecember
2008onacomparativebasis.
6
Thecontainersectorismostvulnerabletoforeigntrade.InNovember2008,
containerproductiongrowthslowedby80.1percentoverthecomparableperiod,
greatlydecreasingthesectorsdemandforsteel.
Upsanddownsofsteelprices
Inthefirsthalfof2008,Chinassteelpricesroseinconsecutivemonthstoa
recordhighbytheendofJune,whenChinascompositesteelpriceindexsoared
by36.35or29.05percentto161.47,againstthe125.12recordedinearly2008.
However,overalldomesticsteelpricesgraduallyfellafterJune,andbecame
subjecttomuchlarger,morerapidandextensivedownwardadjustmentsin
October.BytheendofNovember,thecompositesteelpriceindexhadslidby
59.17or36.64percentto102.3,a14.03percentdecreasecomparedto118.99
forthesameperiodayearprior.
7
Duetothesharpdeclineinsteelprices,domesticsteelproducersincurred
lossestowardstheendoftheyear,asurprisingturnaroundfrompreviousprofits.
TheyhadrealisedprofitsofRMB17.83billionandRMB3.221billioninJune
andSeptemberof2008respectively,butsufferedlossesofRMB5.835billion
andRMB12.78billioninOctoberandNovemberof2008,respectively.Though
priceswentupslightlyinDecember2008,steelproducersstillfacedadeficit
ofRMB29.122billionforthemonth.Altogether,44steelproducerswereinthe
red,accountingfor61.97percentofthesector.
8
UnlikefluctuationsandadjustmentsinChinassteelmarketpriorto2008,the
overallsectorhad,inconsecutivemonths,incurredlossesattributabletothe
sharpfallinsteelpricesonthisoccasion.Thegeneralcorporatelossoverthe
monthhadbeenunprecedentedinrecentyears.
Superficially,itseemsthatbothexportsandinternaldemandaretoblamefor
theindustrydownturn.However,thesectorsinternalstructuralconstraintshave
exacerbatedtheeffectsofthecrisis.Theseconstraintshavecreatedinconsistent
industrystructures,alowindustrialconcentration,anabsenceofeffective
marketadjustmentmechanisms,andcorporatemanagementlimitations.
Thoughtheindustryachievedgrowthandprosperityinrecentyears,someofits
structuralorcriticalproblemswentunnoticedandhaveonlynowsurfaced.
6
7
8
10
Upgradingindustrychains
Lackofinfluenceonupstreamresources
Theupstreamsectoroftheworldsironandsteelindustryischaracterisedby
uniquemineralreservesitesandearlier-achievedhighindustryconcentrations
arisingfromM&Aamongquarrycompanies.Incontrast,thishasresultedinvery
lowindustryconcentrationsfortheworldsironandsteelindustry,andproducers
havelittlesayonrawmaterialsandrelatedproductsforChinasironandsteel
industry.
Currently,AustraliasBHPBillitonandRioTinto,andBrazilsVale(thethree
globallargestironoresuppliers)accountforover75percentoftheworlds
yearlyironoretrading.
9
Astheworldslargeststeelproducerandironore
consumer,Chinasironandsteelindustryhasbeenleftoutofiron-orepricing
negotiationsbecauseoflowindustryconcentrationsanddisorderediron-ore
imports.Since2005,theindustryhasincurredheavylossesduetothispassive
stance,subjectingalllargesteelmakerstohighironoresprices.TheChinaIron
andSteelAssociationhasbeenorganisingandcoordinatingimportediron-ore
pricingnegotiationsforlong-termagreementsinconjunctionwithcompetent
authoritiesandenterprises.Judgingfromthenegotiationresultsforthepastfew
years,thereisstillroomforimprovementingivingChinesesteelproducersmore
poweriniron-orenegotiations.Theseindustry-widecoordinationeffortshave
beenunderminedtoacertainextentbyalackoffurtherregulationsoverimport
tradingofironores.
Promptedbythecurrentdrasticreductioninsteelconsumption,globalquarry
companieshaveresortedtolimitingproductiontomaintainpricestability.
Moreover,theyareattemptingtofurtherincreaseconcentrationthroughM&A
activity.Unlesssuchproblemsaffectingthemareresolved,Chinesesteel
producerswillnotbewell-positionedtotakeadvantageofthesenegotiations
9
China Metallurgical News,20November2008
11
througheffectivemarketadjustmentmechanisms.Conceivably,themarket
isgraduallyunderminingthepursuitofanactiveroleforsteelproducersin
negotiationsbymeansofmarketpriceadjustments.
Toaddresstheseissues,Chinesesteelproducershavetostrengthenthe
industryconcentrationandcontinueM&Aactivitytobolstertheirbargaining
powerinnegotiationsforiron-oreimports.
Downstreamsectorssupplyanddemanddilemma
Facedwithdecliningmarketdemand,Chinassteelmakersandtheir
downstreamindustriesarenowtakingchancesinanattempttosurvivethe
currentdifficulties.Ononehand,steelmillshaveshiftedaheavycostburdento
downstreamconsumers(includingmanufacturersofautomobilesandhousehold
electricalappliances)whenmarketdemandhasnotweakened.Ontheother
hand,diminishedordersfromdownstreamconsumershaveinturndevelopedan
adversesituation(asillustratedbyhighcostandlowdemand)forsteelmakers.
Priortothefinancialcrisis,somedomesticsteelproducersbeganintensive
cooperationwithdownstreamconsumers;forexample,thecooperation
betweenBaosteelandautomobilemanufacturersandbetweenAngangand
shipbuilders.However,thismodel,basedonbalanceddevelopmentofindustry
chains,hasnotbeeneffectivelypromotedamongdomesticsteelproducers.A
numberofthemaretryingtoupsetthebalanceinindustrychains.Thelackof
amechanismforcooperatingwithdownstreamconsumersmeansthatChinas
ironandsteelindustrypossessesweakercompetitivecapabilitiesthantheir
counterpartsinJapan,Korea,EuropeandtheAmericas.
Inresponse,Chinassteelmakersaregraduallychangingtheiroperating
conceptsundertheintensifyingimpactofthefinancialcrisis.Morenewmodels
arecomingupforcooperationbetweensteelmakersandautomobilemakers,
shipbuildersandmachineryproducers.Inotherwords,thecurrentfinancialcrisis
maybringafewpositivedevelopmentsforChinasironandsteelindustryasa
result.
Chart2:Chinasshareoftheworlds
steelproductionin2008
China
Other countries and regions
62.4%
37.6%
Source: China Metallurgical News
12
ThecruxofthematterIndustrystructures
Chinasironandsteelindustryhasbeenovercomewiththeunprecedented
challengesbroughtaboutbythefinancialcrisis.Whileexternalfactorshave
contributedtothedeclineintheindustry,themostimportantandunusual
problemsstilllieindefectiveinternalindustrystructuresasdemonstratedbya
lowindustryconcentration,unreasonableindustrydisposition,andineffective
resourcecontrol.
Inneedofhigherindustryconcentration
In2008,globalcrudesteeloutputreached1.33billiontonneswhileChinas
ironandsteelindustryproducedatotalof500milliontonnesofcrude
steel,accountingfor37.57percentoftheworldsoutput.
10
Inthatyearthe
concentrationofChinasironandsteelindustryincreasedafterundergoinga
spateofreorganisation.Accordingtoreleaseddata,thetoptendomesticsteel
makersbyoutputproducedatotalof212milliontonnesofcrudesteelin2008,
accountingfor42.5percentofthenationalaggregateoutputandrepresentinga
year-on-yearincreaseof5.71percent.
11
Chart3:Chinastoptensteelmakersbycrudesteeloutputin2008
Ranking Nameofsteelmakers Output(in10,000tonnes)
1 Baosteel Group Corporation Limited 3,544
2 Hebei Iron & Steel Group 3,328
3 Wuhan Iron and Steel (Group) Corporation 2,773
4 Anben Iron & Steel Group Co. Ltd. 2,344
5 Jiangsu Shagang Group 2,330
6 Shandong Iron and Steel Group Co. Ltd. 2,184
7 Magang (Group) Holding Company Limited 1,504
8 Shougang Corporation 1,219
9 Hunan Hualing Iron & Steel Group Co. Ltd. 1,126
10 Baotou Iron and Steel (Group) Co. Ltd. 984
Source:China Metallurgical News
10
China Metallurgical News,17June2008
11
ChinaIronandSteelAssociationpressrelease,23February2009
13
Currently,AnshanIronandSteelGroupCorporation,BaosteelGroupCorporation
Limited,WuhanIronandSteel(Group)CorporationandPanzhihuaIronand
Steel(Group)Co.arecentralstate-ownedenterprisesamongthedomesticsteel
makers.
In2008,ChinasironandsteelindustryreachedamilestoneinM&Aactivities.
GuangdongIronandSteelGroupwascreatedafterBaosteelhadrestructured
ShaoguanIronandSteelGroupandGuangzhouIronandSteelCo.Ltd.Guangxi
IronandSteelGroupCo.,Ltd.wasformedafterWuhanIronandSteel(Group)
CorporationhadreorganisedLiuzhouIronandSteel.HebeiIronandSteelGroup
wascreatedoutofthemergerofTangshanIronandSteelandHandanIron
andSteel,andShandongIronandSteelGroupCo.Ltd.wasformedoutofthe
mergerofJinanIronandSteelGroupandLaiwuSteelGroup.
In2008,somelargesteelmakersalsounderwenttechnologicalrenovation,
resultinginsignificantprogressinplantdispositionadjustmentandoptimisation
oftheironandsteelsector.Forexample,AngangsproductionbaseinBayuquan,
Yingkou,beganoperationsafterthecompletionofphaseoneofitsconstruction.
ShougangJingtangcompletedphaseoneofconstructionofitsproductionbase
inCaofeidian.Handanshot-rolledsteelmillcommencedoperationofitsHanbao
base.AdvancedworksofthecoastalZhanjiangandFangchengPortsteel
projectswerecompletedaswell.
Thelevelofconcentrationmentionedabovecomparesfavourablywiththoseof
otherindustries,butisfarbehindthoseofoilandcoalsectors.Internationally,
Japan,Korea,EuropeandAmericahavehigherconcentrationintheirironand
steelindustry,withjustafewsteelmakers.Overseasironoresuppliersalso
havesimilarhighconcentrations.
14
Problemsarisingfromlowindustryconcentration
ControloveroverallcapacityisanotherissueforChinasindustry.Attheend
of2008,Chinahadacrudesteel-productioncapacityof610milliontonnes.An
intendedcapacityof50milliontonnesformillsunderconstructionwillraise
theoverallcapacityto660milliontonnes.Theiron-smeltingandsteel-smelting
capacitiesforplantsnotcompliantwiththeindustrysentrystandardsareabout
160milliontonnesand190milliontonnes,respectively
12
,andquitealotofthese
plantswerebuiltandcommissionedafewyearsago.
Chinasindustryneedstoimproveitsabilitytoinnovate.Thoughapproaching
theworldsleadingstandardsinoverallequipment,Chinaslargesteel
makershavelaggedbehindoverseascompetitorsinautonomousinnovation,
commercialisationoftechnologicalachievements,softwaredevelopment,and
systemintegration,aswellasenergysavingandemissionreductiontechnology.
Domestically,somehigh-endkeysteelproductsremaininshortsupplyand
Chinaimportsabout7milliontonnesoftheseannually.Chinaisstillnotup
totheinternationalstandardsinadvancedsteelproductiontechnology,orin
theresearchanddevelopment(R&D)ofhigh-endsteelproductsandtheir
applications.SomeoftheChinesecommonsteelproductsarealsooflower
quality,cateringtomedium-tolow-endconsumers.Moreover,owingtolow
industryconcentration,Chinassteelmakersaremostlyengagedinautonomous
innovation.
Consequently,theabilityforChinasindividualsteelmakerstoinnovate
technologicallyisnotrepresentativeoftheindustrysR&Dstrength.This
explainswhymoreM&AactivitiesareneededforChinasironandsteelindustry.
Currently,onlyBaosteelhascuttingedgeresearchinstitutes,whereasNippon
SteelCorporationinJapanandPohangIronandSteelCo.Ltd.inKoreaare
representativeoftheirrespectivecountrysoverallR&Dstrength,thoughthey
havenotreceivedtoomanygovernmentgrants.
Chinasindustryneedstoupgradeitsdistributionnetwork.Moreandmoresteel
makershaveemergedinChina,andageographicallydisperseddistribution
networkhasresultedin60percentofdomesticsteelproductsbeingsold
throughover150,000speculativedistributors.Takingadvantageoftheprevailing
financialcrisis,thesedistributorshaveexacerbatedtheimbalancebetween
supplyanddemandbyselling-offsteelproductsinthemarket.Thishasnotonly
affectedthenormaldistributionofsteelproducts,butalsocausedover-reaction
inthemarket.
Theneedforanewindustrymodel
Inrecentyears,somedomesticsteelmakersreapedmoreprofitsbyincreasing
productiontomeettherapidlygrowingmarketdemand.Someregional
entitiesrichinironoreandcoalresourceshavealsoinvestedinlucrativesteel
enterprises.Thishasresultedinalowerregionalallowableemissionlevel,over-
exploitationofresources,andashortageofwaterresources.
Animportantelementintheironandsteelindustrydevelopment,water
resourcesareveryunevenlydistributedinChina.WhileHebeihasbeenthe
12
15
largeststeel-producingChineseprovinceforconsecutiveyearsproducingover
100milliontonnesofrawiron,crudesteelandsteelproductsin2007itswater
resourcevolumepercapitaisonly305cubicmetresanditsannualprovincialwater
resourcevolumereaches16,700millioncubicmetres.Thisfallsshortofitsdemand
forwaterresources,whichstandsat22,000millioncubicmetres,
13
withthegap
filledsolelybyundergroundwatersupplies.Waterresourceshavealreadybecome
asignificantfactorforthesubsistenceanddevelopmentoftheironandsteel
industryinHebei,andakeyenvironmentalimpactassessmentindicatorforthe
sustainabledevelopmentofChinasironandsteelindustry.
Environmentally,thesacrificesmadebyBeijingandHebeiinrelocatingShougang
Groupserveasagoodexample.Thelargefactory,withasteelproductioncapacity
of10milliontonnes,wasmovedtoimproveBeijingsairqualityandprovide
environmentalprotectionduringtheBeijing2008OlympicGames.
Moreover,somedomesticsteelmakerssufferfallingprofitsastheyhavetobear
highlogisticscostsforrawmaterialimportsandsteelproductsales.Atpresent,
somesteelmakersinChinasinlandregions(particularlyincentralChina)payRMB
100morepertonnefortransportationofimportedironorethancostalsteelmills,
suchasBaosteel.
Inviewofthis,buildinganewindustrymodelwillbecomepivotaltothefuture
developmentofChinasironandsteelindustry.
Theneedforstrengthenedcontroloverresources
ThebiggestbottleneckinthedevelopmentofChinasironandsteelindustrylies
withironoreresources.Theworldisabundantinironore:accordingtostatistics,
totaldepositsstandat160,000milliontonnes,including79,000milliontonneswith
ironcontent,whileitsreservebasehas370,000milliontonnes,including180,000
milliontonneswithironcontent.Currentprovenironoredepositscanmeetthe
demandforthenext100years.
14
Chinaisalsorichinironoredeposits,buttheyare
ofalowergrade,withprovendepositsofabout60,700million(80percentofwhich
ispoorore).Givenalowergrade,alongerminingcycleandalackofinvestment
duringinitialmining,aswellasanexcessivegrowthofsteelproduction,Chinas
Chart4:PatternofrelianceofChinasironandsteelindustryonimportedironorebetween2000-2008
In 10,000 tonnes
2000 2001 2002 2003 2004 2005 2006 2007 2008
5,000
0 0
10,000
15,000
20,000
25,000
30,000
20%
10%
35,000
30%
40,000
40%
45,000
50%
50,000 60%
36.1%
41.0% 40.5%
43.0%
48.1%
49.5%
48.9%
49.8% 49.5%
Imported iron ore (in 10,000 tonnes)
Iron content of imported iron ore (in 10,000 tonnes)
Proportion of raw iron production from imported
iron ore (%)
13
14 China Metallurgical News,19June2009
16
ironandsteelindustryhassufferedashortageofironoreresourcesandbecome
increasinglyreliantonimportedironoreforthelastfiveyears.
Since2000,Chinasironoreconsumptionhasgrownatanaverageannual
compoundrateof20.1percent.In2007,Chinaimported383milliontonnesof
ironore,accountingfor52.1percentoftheglobalseatransporttradebyvolume.
Chinasdegreeofrelianceonimportedironorerosefrom34percentin2000to
53percentin2007.
15
Ironoredistributionischaracterisedbyconcentrationwhilesteelmillsand
productionarerelativelydispersedduetothetransportradiusfactor.In2006,
theworldstenlargeststeelmakerscommandedamarketshareof28percent,
andtheironoretradingvolumeofBHPBilliton,RioTintoandValetogether
accountedfor75percentoftheglobalironoresupplyvolume.
16
Chart5:Theworldsthreelargestproducersshareoftheworldsironoresupply
volumein2006
BHP Billiton, Rio Tinto and Vale
Other producers
25%
75%
InadditiontoabundantironoreinBrazil,Australia,andIndia,othercountries
suchasRussia,Kazakhstan,Ukraine,andSouthAfricaarecommittedto
increasingtheirironoreproduction.Chinassteelmakersmustthereforeworkto
strengthentheircontroloveroverseasironoreresources.
Excesscapacity
In1996,Chinassteelproductionreached100milliontonnesforthefirsttime.
Between1999and2000,itproducedanadditionalseveralmilliontonnesof
steelannually.By2001,thegrowthofChinasironandsteelindustrygathered
momentum,withanoutputof151milliontonnes,up23.13milliontonnesor18.0
percent.By2005,itsoutputincreasedatanannualrateofover20percent,with
arecordgrowthof60.50milliontonnes,or27.2percent,in2004.
17
On20July2005,ChinasNationalDevelopmentandReformCommission
(NDRC)issuedtheDevelopment Policies for the Iron and Steel Industry,withthe
viewtomanagingthedisjointeddevelopmentoftheindustryonamacrolevel.
Tosupporttheseinitiatives,variousgovernmentdepartmentslaterintroduced
15
16
17
China Metallurgical News,4December2008
17
respectiveland,environment,capital,andtaxpoliciesinanattempttodampen
theoverheatedironandsteelindustry.However,theycouldnotachievetheir
intendedresults.Chinascrudesteelproductiongrowthdroppedby19.7percent
in2006,and15.9percentin2007,andtheoutputsneverthelessincreasedby
69.56milliontonnesin2006,and67milliontonnesin2007.
18
Hebeiservesagainasagoodexampleoftheproblemofexcesscapacity.It
isthelargeststeel-producingprovinceinChina,andhasthelargestnumber
ofprivatesteelmakers.In2007,Hebeihad26steelmakerswithanannual
capacityofoveronemilliontonnes,whileitsprivatesteelmakersaltogether
produced71.859milliontonnesofcrudesteel,accountingfor67.12percentof
theprovincialoutput,
19
or36percentofthenationaloutput(197milliontonnes)
fromprivatesteelmakersacrossthecountry.
20
ThemajorityofHebeisprivate
steelmakersexpandedrapidlyoverthelasttenyearswithoutgoingthrough
therequiredreviewsorapprovalproceduresformanyoftheirinfrastructuralor
technologicalinnovationprojects.Todate,thesenon-compliancepractisesare
foundnotonlyinHebei,butalsoinotherChineseprovincestovaryingdegrees.
Havingbeenunresolvedformanyyears,thisissuehastroubledsteelmakers
(inareasoflocalenvironmentalprotection,managementofenergysavingsand
emissionreduction,aswellasbankloans),withdirectimplicationsfortheir
subsequentgrowthinamoreorganisedandeffectivemanner.
Apartfromexcessiveexpansionofcapacityanddisorderlydevelopment,Chinas
ironandsteelindustryhasalsowitnessedintensifiedcompetitionbetween
similarproductsamonglargesteelmakers.
Forexample,Chinasoverallcapacityforcold-rollingandsteel-stripmachinery
soaredfrom13milliontonnesin2001to75milliontonnesbytheendof2008.
21
Thedomesticironandsteelindustry(whichrapidlyexpandedatthebaselevel)
failedtocompetewithothermarketplayersinadifferentialmannerthrough
adjustmentstoproductmix.Instead,theindustrywasthreatenedwiththe
worseningproblemofproducthomogenisation(asdemonstratedbythesimilar
productsandmarketingapproaches).Inthesecircumstances,manyotherswere
attractedtoenterthemarketamidcompetitionbetweensimilarproducts.Asa
result,themarketsupplysubsequentlyexceededdemandalongwithanexcess
capacity.
Accordingtoindustrydevelopmentcycles,productdemandwillnotremainat
apeaklevelforanunlimitedperiod,andbuildingupproductioncapacitywill
takesometime.Therefore,thedemandpeakwillsubsideandevenreachthe
bottomlevelwhenaplantcommencesoperation,missingtheoptimummoment
forcommissioning.Thiscanbebestdemonstratedbythedevelopmentofthe
shipbuildingandship-platemanufacturingsectors.
Japansironandsteelindustryprovidesaneffectivedirectcomparison.Asone
oftheworldsmajorsteel-producingcountries,JapandominatedAsiassteel
productionandsaleformuchofthetwentiethcentury.Withtheemergenceof
Chinasironandsteelindustry,Japanssectorhasmaintainedaleadingposition
inindustrystructures,productgrading,andtechnologicalknow-how,despiteno
changesinoutput.
18
19
China Metallurgical News,3April2008
20
China Metallurgical News,3April2008
21 China Metallurgical News,4December2008
2005 2006 2007

0%
80.0%
81.0%
80.5%
81.5%
80.89%
80.99%
81.06%
18
In1961,Japanssixlargeststeelmakers(YawataIronandSteelCo.,Ltd.,Fuji
IronandSteelCo.,Ltd.,NKKCorp.,KawasakiSteel,SumitomoMetalIndustries,
andKobeSteel)hadanaggregateproductionthataccountedfor68.40percent
ofthenationaloutput.ThishighindustryconcentrationpersistedinJapan.
Between2005and2007,Japanscrudesteelproductionroseyear-on-year
(withoutputof112milliontonnesin2005,116milliontonnesin2006,and120
milliontonnesin2007),alongwithincreasedindustryconcentration.Nippon
SteelCorp.,JFE,SumitomoMetalIndustriesandKobeSteelhadanaggregate
productionthataccountedfor74.41percentofthenationaloutputin2005,74.89
percentin2006,and74.77percentin2007.CoupledwithNissinSteelandTokyo
Steel,theyhadanaggregateproductionthataccountedfor80.89percentofthe
nationaloutputin2005,80.94percentin2006,and81.06percentin2007.
22
Chart6:
(a)Japanscrudesteelproductionbetween (b)ProductionofJapansfourlargest (c)ProductionofJapanssixlargest
2005and2007 steelmakersasapercentageofthe steelmakersasapercentageofthe
nationaloutput nationaloutput
In 100 million tonnes
0.9
1.0
1.1
1.2
1.3
1.12
1.16
1.20
74.6%
74.8%
75.0%
75.2%
74.4%
74.41%
74.89%
74.77%
80.0%
81.0%
80.5%
81.5%
80.89%
80.99%
81.06%
0
2005 2006 2007
0%
2005 2006 2007
0%
2005 2006 2007
Japansironandsteelindustrydispositionischaracterisedbycoastal
concentrationsoflargesteelmills.Mostofthesesteelconglomeratesare
centredaroundthefivelargestindustrialregions(Tokyo-Yokohama,Osaka-
Kobe,Chukyo,SetoNaikai,andNorthKyushuregions).Theseclustersformed
theworldshighestconcentratedironandsteelindustryregion.Builtoncoastal
areasreclaimedfromthesea,withawaterdepthofover15metres,thesesteel
millsenjoygreatlogisticalconvenience.
Anotherfeatureisadisperseddistributionofsmallandmedium-sizedsteel
plantsacrossthecountry.Clusteringtogethertoacertaindegree,theycan
alsoachievebenefitsofindustryconcentration.Theirsubsistenceisaresult
ofthefollowing:manysmallplantsareannexedtolargesteelmills;large
steelenterpriseshavedirectlyinvestedinsmallfirmsorcontrolledthelatters
shares;andsmallandmedium-sizedplantsactascontractorsforlargemills.
Complementingtheselargemills,alotofsmallandmedium-sizedsteelplants
alsoenjoygoodreputationsinJapan.
22
China Metallurgical News,28August2008
19

20
Nextsteptoaddressstructuralissues
Governmentinitiatives
Historically,Chinasironandsteelindustrywasdominatedbystate-owned
enterprises.However,withthedevelopmentofthemarketeconomyinChina,
thesestate-controlledsteelmakers,liketheirpeersinotherindustries,have
comeunderincreasingcompetitionfromprivateandforeign-ownedsteel
makers,whichhavegraduallygrowntoasizablescalewithinafewyears.For
example,ShaganginJiangsuandJianlonginHebei,whichareleadersinregional
markets,haveemployedmoreflexibletactics,posingathreattosomesmalland
mediumandevenlargestate-ownedsteelenterprises.YetChinasstate-owned
steelmillsremainconstrictedbyinflexibleoperatingmechanismsandlow
competitiveness.Inthesecircumstances,asthemanagerofthesestate-owned
assets,theChinesegovernmentshouldexpeditereformstosafeguardasset
growth.Itshouldencouragelarge-scaleM&Aactivityamongstate-ownedsteel
millsthroughpoliciestoenhancetheircompetitivenessandmarketpresence.
On8July2005,theNDRCissuedtheDevelopment Policies for the Iron
and Steel Industry,whichspecifiesthatthereisaneedforhigherindustry
concentrationbymeansofstructuraladjustments,M&As,andexpansionsof
keymarketplayerswithcompetitivestrengths.By2010,thenumberofiron
andsteelsmeltingplantswillbesignificantlyreduced,whilethecombined
productionofthetenlargestdomesticsteelmakerswillaccountforover50
percentofthenationaloutput,andover70percentby2020.
Inparticular,thefollowingissetoutinChapter5StructuralAdjustmentsof
EnterprisesoftheDevelopment Policies for the Iron and Steel Industry:
The government will support steel makers to implement structural adjustments
and industry upgrades by grouping them as conglomerates through strategic
restructuring in the form of partnerships, M&As and cross-holding of shares.
Many other market players will be eliminated. In addition, it will support and
promote cross-regional M&As for capable large steel makers, aiming to create
two market heavyweights each with a production capacity of 30 million tonnes
and several other giant players, each with a production capacity of 10 million
tonnes, that can compete against overseas players by 2010.

21
The government will require large iron and steel enterprises to transform into
joint stock companies and support them in seeking public floats. It will also
encourage existing steel makers to undergo restructuring and M&As including
capital realignments and mechanism renovations through equity participation (by
private investors among others).
The government will encourage capable large steel makers formed by M&As to
properly increase their operating scale and intensive production activities by way
of structural adjustments and industry upgrades. Moreover, it will provide them
with policy incentives in the following areas: primary and secondary business
separation, personnel redeployment, and social security benefits.
Thedevelopmentpoliciesalsospelloutspecificrequirementsforthefollowing
regions:
AnshanBenxi region in northeast China is relatively rich in iron ore in addition
to water resources and stands close to coal mines. According to development
strategies for reinvigorating traditional industrial bases in northeast China, regional
steel makers should undergo M&As and develop quality production bases to
form internationally competitive conglomerates, while eliminating those with
backward capacity.
North China suffers a shortage of water resources and a low capacity. The
region should consider environmental and ecological factors for its prioritised
restructuring and M&A activities, and stringently control an expansion of
production facilities and capacity. Furthermore, it should relocate the Shougang
plants and proceed with M&As for Hebeis iron and steel industry.
East China has great market potential for steel products, but its iron and
steel industry disposition is too concentrated. In response, its key players
with competitive strengths may increase their production concentration and
international competitiveness by adjusting its structure and product mix.
Awin-winM&Astory
After merging Jigang with Laigang,
Shandong Iron and Steel Group will then
restructure Rizhao Iron and Steel Group,
moderately downsize Jigang and Laigang,
and finally move to coastal locations. Having
reduced capacities, Jigang and Laigang
will no longer expand their production,
but will instead focus on quality and
variety. They will subsequently engage in
different operations. Shandong Iron and
Steel Group targets to achieve production
capacities which will represent 80%-90%
(for the entire group), and about 50% (for
its coastal plants), of the provincial output.
These initiatives can help the group save
considerable logistics costs, and are also
conducive to adjusting its product mix
and eliminating plants with a backward
capacity.
23

Zou Zhongchen, Chairman of Shandong Iron
and Steel Group.
23

22
Central South China has rich water resources and convenient water
transportation, with deep-water ports in south-eastern coastal areas. Capitalising
on these advantages, its steel makers should form conglomerates through M&As
and relocations of urban mills.
Southwest China has abundant water resources as well as large iron ore and
coal deposits around the Panzhihua-Xichang area, which is not readily accessible.
In this respect, its key players should upgrade plant equipment, improve their
product mix, and develop high value-added products. They should determine
output based on the sustainable level of ore supply, rather than simply seeking
volume growth.
Northwest China is deficient in iron ore and water resources. Its key players
should therefore focus on meeting regional needs rather than seeking expansion,
and use mineral resources in neighboring countries.
Chart7:M&AsforChinasironandsteelsectorbetween2004and2009
MergersandacquisitionsinChinasironandsteelsectorbetween2004and2009
Groupname M&As Year Crudesteeloutputin
2008(in10,000tonnes)
Northeast Special Steel Group Founding of the group 2004 140.28
Wugang Group 1. Restructuring of Ergang
2. Restructuring of Kungang
3. Restructuring of Liugang to form Guangxi Iron and Steel Group
4. Fangcheng Port Project
1. 2005
2. 2007
3. 2008
4. 2008 (approved)
2,733.39
Baosteel Group 1. Acquisition of Xinjiang Bayi Iron and Steel
2. Hangang New Zone
3. Guangdong Iron and steel Group
4. Zhanjiang Base
5. Restructuring of Ningbo Iron and Steel
1. 2007
2. 2007
3. 2008
4. 2008 (approved)
5. 2009
3,544.3
Anben Group 1. Joint venture with Linggang to form a new base
2. Bayuquan Base
3. Equity participation in Tiantie Group
2. 2007
1. 2008 (in operation)
3. 2008
2,343.93
Hualing Iron & Steel Control over Jiangsu Xigang Group 2007 1,125.69
Taigang Group Joint venture between Taiyuan Iron and Steel (Group) Co., Ltd. and
Tianjin Steel Tube (Group) Co., Ltd. to form Tianjin Taigang Tianguan
Stainless Steel Co., Ltd.
2007 920.17
Magang Group Merging with Anhui Hefei Iron and Steel Group, and 71% interested
in Magang (Hefei) Iron and Steel Co., Ltd.
2007 1,503.9
Pangang Group Restructuring of Xichang New Steel (Group) Co., Ltd. 2007 751.01
Shagang Group Merging with Jiangsu Huaigang, Yonggang, Henan Yongxin Steel
Plant
2007 2,330.46
Jianlong Group Equity participation in Tonggang Group 2007 654.25
Hebei Iron and Steel Group Founded by a joint venture between Tanggang Group and Hangang
Group
2008 3,328.39
Shandong Iron and Steel Group Founded by a joint venture among Jinan Iron and Steel Group, Laiwu
Iron and Steel Group, and Shandong Provincial Metallurgy Co.
2008 2,184.08
Shougang Corporation Caofeidian iron and steel base project Commissioned in April 2009 1,219.28

23
Since2005,Chinassteelmakers(includingcentralstate-ownedenterprises
andlocalandprivateentities)havebeenconsolidating.By2008,crudesteel
productionbyrestructuredsteelgroupsaccountedfor53.6percentofthe
nationaloutput,representingsignificantprogress.Baosteelwasstillthelargest
steelproducerinChina,witha7.1percentshareofthenationaloutput,followed
byHebeiIronandSteelGroup(6.7percent),WugangGroup(5.5percent),
AnbenGroup(4.68percent),andShagangGroup(4.66percent).Theircombined
productionrepresenteda28.61percentshare.
24
TheAdjustmentsandRevitalisationPlanningfortheIronandSteelIndustry
(announcedearlierinChina)hasalsosetoutcorrespondingrequirementsfor
increasedindustryconcentration:
Efforts should be made in the following areas:
1. further leveraging the leading roles of Baosteel, Anben, and Wugang;
2. pushing Anben, Guangdong Iron and Steel, Guangxi Iron and Steel, Hebei
Iron and Steel, and Shandong Iron and Steel to complete substantive
reorganisations for unified management of production, supply and marketing,
as well as human and financial resources and physical assets;
3. promoting cross-regional restructuring activities among Anben, Pangang and
Northeast Special Steel, as well as among Baosteel, Baogang and Ningbo Iron
and Steel; and
4. supporting regional restructuring activities among Tianjin Steel Tube, Tiantie,
Tiangang, and Tianjin Metallurgy Co., as well as between Taigang and other
iron and steel enterprises in Shanxi province.
China aims to create several internationally competitive market giants such as
Baosteel, Anben and Wugang, each with a production capacity of over 50 million
tonnes, and some other large steel makers, each with a production capacity of
10-30 million tonnes, across the country by 2011.
Corporatedevelopmentneeds
Inthefaceofintensemarketcompetitionandincreasinglystringent
environmentalrequirements,somelargesteelmakersinChinaarerealisingthat
theycannotremaincompetitivewithoutchangestotheirstrategyencompassing
M&A,marketpositioning,orcontrolofupstream,strategicresources.
ThereisageneralindustryviewthatM&Acanhelpboostindustryconcentration
formorereasonableindustrystructuresandincreasethesizeofsome
enterpriseswithenhancedcompetitiveness.Thistranslatesintoimproved
resourceallocation,continuedtechnologicalupgrading,massiveenvironmental
investment,stableindustrychains,andultimately,sustainabledevelopmentof
theironandsteelindustry.
Policyrulesonforeigndirect
investmentsinChinasiron
andsteelsector
In accordance with the Catalogue Guiding
Foreign Direct Investment in Industry (2004
Revised), effective 1 January 2005, the
Chinese government will exempt foreign
direct investments in the following
designated projects from customs duties
on imported equipment and import VAT:
mining and dressing (limited to equity
and cooperative joint ventures) of low-
grade, difficult-to-dress mineral ore; iron
and manganese exploration, mining, and
dressing; as well as direct reduced and
fusion-reduced iron production.
Article 23 of the Development Policies for
the Iron and Steel Industry (released by the
Chinese government on 20 July 2005) also
sets out the following requirements for
foreign investment in Chinas iron and steel
industry:
For iron- or steel-smelting or steel-
rolling projects, the proportion of an
enterprises own capital should reach 40
percent or above.
Overseas steel makers intending to
invest in Chinas industry must have
proprietary intellectual property and
technology, with their common steel
output for the prior year exceeding 10
million tonnes or their special alloy steel
output exceeding one million tonnes.
Foreign non-steel makers intending to
invest in Chinas industry must have
capital strength and high credibility, and
be able to provide capital verification
reports and performance proof issued
by accounting firms or banks.
Foreign investors must comply with
national plans for the industrys
upgrades or facility relocation without
opening new sites. In principle, they are
forbidden to take a controlling stake in a
domestic iron and steel enterprise.
24

24
Soundindustrydisposition,andareasonableindustryconcentrationinparticular,
isapreconditionthatenablescontinuedupgrading,convergence,dissemination
andsharingoftechnology.Continuedtechnologicaldevelopmentandrenovation
forresourceapplications,theenvironment,conventionalproductsand
craftsmanshiprequiresconsiderableinvestmentandaccumulatedexperience
andcapabilities.
Entitiescanenjoyeconomiesofscalewithenergysavingsandreductionof
consumptionbyexpandingthroughM&A.Byusinglargefacilities,sizable
enterprisesmayenjoygreaterenergyefficiencythantheirsmallandmedium
marketpeers.LargesteelmakershaveacompetitiveedgeinR&Dandapplying
advancedenergy-savingandenvironmentaltechnologies.Bybeingmoresocially
responsible,theyhavegreaterR&Dabilitiesandcapacitiesforproducingenergy-
savingsteelproductstomeetusersneeds.Throughinternaladjustments,they
canalsoachievereasonableindustrydispositions,resultinginenergysavingsfor
distributionsofrawmaterialsandsteelproducts.
Theneedtocompeteagainstoverseasplayers
Chinasrapidlygrowingandlow-concentratedironandsteelindustryhashelped
foreignsteelmakerswithcompetitivestrengthsandgreatM&Aexperienceto
undertakeM&AactivitiesinChina.ForeigninvestorsM&Aactivitiestargeting
domesticsteelmakersgatheredmomentuminrecentyears.Forinstance,
ArcelorMittalboughtastakeinHualingIron&SteelGroupin2005andLaigang
inFebruary2006.OtherforeignentitiessuchasPohangareproactively
increasingtheirpresenceinChinathroughequityandcooperativejointventures
andM&A.MarketcompetitioninChinasindustryisincreasingintensely.
CurrentstatusofforeignsteelmakersinvestmentsinChina
ArcelorMittal Prior to consolidation, ArcelorMittal was highly interested in establishing a presence in Chinas iron and steel industry. It once approached
Laigang, Bayi Iron and Steel, and Baogang on separate occasions for proposed M&A transactions. The move failed due to the ban on foreign
investors acquiring a controlling stake in domestic entities under the Development Policies for the Iron and Steel Industry. In January 2005,
ArcelorMittal became Hunan Hualing Iron & Steel Groups second largest shareholder by buying a 36.67 percent interest in Hualing Valin
Steel Tube and Wire at a consideration of USD 338 million. In November 2007, ArcelorMittal became China Oriental Groups second largest
shareholder by buying a 28 percent interest from Ning Ning (the latters second largest shareholder) and others for a consideration of USD
647 million.
25
In addition, ArcelorMittal has a 12 percent interest in Baosteel-NSC/Arcelor Automotive Steel Sheets Co., Ltd. (BNA), a joint venture among
Baosteel, Nippon Steel Corp. and ArcelorMittal.
NipponSteelCorp. Nippon Steel Corp. established its relationship with Chinas steel makers as early as at the time of Baosteels construction, which was based
on Nippon Steel Corp.s design. By virtue of this relationship, Nippon Steel Corp., Baosteel, and ArcelorMittal jointly set up BNA, with shares
distributed at 38 percent, 50 percent, and 12 percent, respectively.
26
JFEGroup JFE made investments in China in response to competition from Nippon Steel Corp. In October 2003, JFE and Guangzhou Iron and Steel Group
agreed to jointly set up Guangzhou JFE Steel Plate Co., Ltd. in the Nansha Development Zone, with a total investment of RMB 1.3 billion and a
registered capital of RMB 627 million. JFE has a 51 percent interest in the joint venture. 27 In light of its similar plant investments and timing of
other operations, as well as product specifications and applications against those of BNA, the joint venture represents, to a greater extent, a move
to compete against Nippon Steel Corp.
EvrazGroup Evraz Group entered Chinas market in 2008. On 19 February 2008, the Group agreed to purchase a 10 percent interest in Singapore-listed Delong
Holdings Ltd., with a conditional option to increase its shareholding up to 51 percent within a six-month period at the same consideration. The
maximum capital contribution reached about USD 1.4 billion.
28
25
ChinaMetallurgicalNews,13December2008
26
ChinaMetallurgicalNews,31August2008
27
ChinaMetallurgicalNews,5November2003
28
ChinaMetallurgicalNews,4March2008
25
JapanIronandSteelFederationsviewsonM&AinChinasironandsteelindustry
Mr. Hitoshi Ito, Chief Representative of the Japan Iron and Steel Federation Representative Office in Beijing,
shared the following views during an interview in September 2008:
In 2008, Chinas spate of M&A activities attracted much attention from Japans iron and steel industry. In particular, the establishment of Hebei
Iron and Steel Group, Shandong Iron and Steel Group, and Guangdong Iron and Steel Group, as well as Guangxi Iron and Steel Group, marked the
large progress of M&A activities in Chinas iron and steel industry. Furthermore, the construction of four coastal steel production bases in Bayuquan,
Caofeidian, Zhanjiang, and Fangcheng Port have been in the limelight because of their great implications for the disposition of Chinas industry.
Japans steel makers have varied opinions towards Chinas M&A activities. Some still believe that the current developments in China are not real M&A
activities due to the fact that entities involved are allied without consolidation. Others have opined that the M&A activities conducted by some large
domestic steel makers such as Baosteel have not only complied with the Development Policies for the Iron and Steel Industry, but also represented a
choice of increased marketisation under practical circumstances. The second viewpoint has now become mainstream in the market. Recently, certain
cases have illustrated that Chinas iron and steel industry is proactively and pragmatically undergoing M&A.
At present, Japans steel makers as prospective investors focus on the steel consumption market in China. Unlike ArcelorMittal, Japans key players
have made overseas investments mostly in response to local actual market needs, but without investing in construction of production bases since they
are inexperienced in these projects. Japans market peers believe that ArcelorMittals current investments in China (targeting largely small and medium
steel makers) have not only evaded Chinas policy restrictions, but also conformed with its long-term development interests.
In line with Japanese investment patterns, Japans steel makers will not invest until there is a local demand from customers such as Toyota, Honda,
and Panasonic. Moreover, their investments are made mainly in the form of equity participation in joint ventures instead of M&A, which are not readily
undertaken.
Consequently, Japanese steel makers investments in the near future will depend on Chinas market demand and especially that of Japanese
automobile and manufacturing industries arising from the Chinese market. Take, for example, the current investments of JFE and Nippon Steel Corp. in
China; the level of changes in Japanese steel makers investments in China is subject to the demands of downstream users.
29
Forthetimebeing,foreigncontrolofChinassteelmakerswillnotbeallowed,
mainlybecauseoftherestrictivemeasuresundertheDevelopment Policies for
the Iron and Steel Industry.AmideconomicglobalisationandChinasopeningup
totheworld,Chineseentitiesshouldendeavourtoavoidbecomingthetarget
offoreigncompetitorsM&AinitiativesbyincreasedcompetitivenessandM&A
coststhrougheffectiverestructuringofdomesticmarketpeers.
Ontheotherhand,Chinassteelmakerscangainmanagementexperienceand
acquiretechnologicalR&Dcapabilitiesbycooperatingwithinternationalplayers,
whileeffectivelyadoptingthelattersmarketingapproachesandnetworksto
realiseglobalexpansionstrategies.
Theneedforcontroloverresources
Chinassteelmakers(aspartoftheindustrychains)indisputablyneedtohave
asayonpricenegotiationswithforeignleadingplayers.Giventhelimited
resourcesinChina,domestickeyplayershavealsoattemptedtogaincontrol
overnationalmineralresourcesthroughM&Astrategies.
29
InterviewwithChina Metallurgical News, September2008
26
Mr.SandyChim,ChairmanoftheCenturyIronOreGroupandAugyvaMiningResourcesInc.,gave
thesecommentsregardingoverseasM&AactivitiesofChinassteelmakersduringaninterviewin
September2008.
Question: Recently, Chinese entities have completed several acquisitions of overseas resources. According to
market sources, Hualing Group will become FMGs second largest shareholder after acquiring for cash the latters
outstanding 16.48 percent shares. Does this mean that there is a growing trend of Chinese entities purchasing
overseas resources and mineral ores?
Mr Chim: China has made the right moves in its M&A activities, as some foreign mineral companies have run into financial difficulties. For instance,
laden with debt burdens of USD 40 billion, Rio Tinto was anxiously working out repayment plans early this year when its financially capable Chinese
peers were willing to make cash offers to buy its shares. This intended transaction was beneficial to both parties.
Through equity participation in foreign mineral companies, Chinese entities can not only acquire prime assets at low prices, but also have a say on
ore pricing, which will help stabilise production costs and upgrade risk controls. This year Chinalco bought a 15 percent interest in Hamersley (Rio
Tintos subsidiary) and signed an agreement with it for its fixed annual supply of 50 million tonnes of iron ore. This has partly lessened the pressure of
negotiations over iron ore purchases, and also served the long-term development interests of Chinas steel makers.
Furthermore, Chinese M&A activities have met with greatly-reduced objections from overseas governments. In prior years, similar activities proved
unfruitful on many occasions. Among these, Shougangs previous takeover offer for Mount Gibson Iron Ltd. was once rejected by the Australian
government for allegedly breaching local M&A regulations and company law. Now that foreign mineral companies have become financially distressed,
their insolvency issues will, if not duly addressed, result in greater social implications. In response, their Chinese buyers are making acceptable offers,
and overseas governments will be very much unlikely to intervene in these transactions.
In view of the above, now is an opportune time for Chinese steel makers to acquire foreign mineral companies.
Question: To what extent can overseas M&As help China to have more say on ore pricing?
Mr Chim: Overseas deals will certainly help China to have more say on ore pricing, but will not completely change the status quo. This is because
only iron ore pricing is negotiated between buyers and sellers while prices of other minerals are determined in open or futures markets. The worlds
three largest iron ore suppliers are BHP Billiton, Rio Tinto, and Vale, accounting for 80 percent of global seaborne iron ore trades. It is indeed a sellers
market for iron ore. Moreover, blast furnaces of buyers (steel makers) cannot suspend operation, thereby making their demand inelastic, while sellers
have the option not to sell if ore prices are excessively low. This has further impaired buyers right to have a say on ore pricing.
Given Chinas continued heavy reliance on imported iron ore, it will remain a sellers market for iron ore following economic recovery. As foreign sellers
usually take the initiative in iron ore price negotiations, China is in a disadvantageous position. With a huge demand for iron ore, China still fails to
completely change its passive role by taking the initiative in price negotiations, though it now has more say on these activities thanks to its recent
successful M&A activities.
TheseM&Aactivitieshavealsoinvolvedupstreamentitiesintheformof
strategiccooperationbetweensteelmakersandironoreminersaswellassteel
makersandcoalproducers.Inaddition,theresourcereserveofsteelmakers
withaccesstomineralresourceshasbecomeamatterofconcernforlargesteel
makersinrespectoftheirstrategicrequirementsforM&A.
TakingadvantageofChinasgo-outpolicy,Angang,Baosteel,andWugang
(threeleadingplayers)havealsoinvestedinoverseasmineralmarkets.Todate,
investmentopportunitiesinforeignmineralsectorshaveblossomedamida
wideningworldfinancialcrisis.
27
28
Difficultiesamidreform
TheironandsteelindustryinChinafacesdifficultiesindevelopment.Enterprises
andforcesfromthegovernmentaredrivingtheindustrytochangeitsinternal
structures.Theadjustmentprocess,however,isroughandproblemsare
graduallyemerging.
Chinasironandsteelindustryneedstorestructure,butconflictingsubjective
interestsandobjectivefactorsinmostenterprisesmayposeobstaclesinthe
process.Majorproblemsobservedunderdomesticcircumstancesincludethe
complicatedlineofauthorityandtaxation,complicationsofstaffdeployment,
andculturalintegration.
Linesofauthorityandtaxationarecomplicatedastheindustryinvolvescentral
state-ownedenterprises,provincialenterprisesandmunicipalenterprises.When
theseenterprisesarerestructuredintoabigenterprise,theintricateconflicts
ofinterestwillposehugeobstaclestotherestructuringofassets.When
state-ownedenterprisesrestructurecross-regionalandcross-departmental
businesses,themyriadofinterestsseemstohavebecomeanunsolvable
problem.
InChina,allM&Aactivity,whetherintheformoftransferoracquisitionby
agreement,iscontrolledbytheregulatorybodies.Forthisstate-dominated
industry,themergersofenterprisesaresubstantiallyaninterest-balancing
process.Thekeytosolvingthisproblemisthegovernmentsawarenessofthe
necessityandimportanceofM&Aandtheneedtomakeconcessionsforthe
industryslong-termdevelopment.
Theredeploymentoflargenumbersofstaffandseniormanagerswhoare
maderedundantthroughrestructuringisalsoacomplicatedissue.This
concernalsoholdstheindustrybackfromintegration.Insteadofembracing
M&A,themanagementoftheacquiredenterprisestendtoresistit,which
isunderstandablesincetherewillbesignificantchangesintheexisting
managementandtheymayendupholdingminorpositionswhentheir
companiesareturnedintobranches.
29
Theseproblemscannotbesolvedbytheenterprisesthemselves.Coordination
anddecisionsathigh-levelgovernmentauthoritiesarerequiredtorestructure
theassetsofChinasironandsteelindustry.Therestructuringshouldbea
concernoftheownersratherthanthemanagementsincetheseenterprisesare
state-ownedorcontrolledinnature.Clarifyingownership,implementingtaxation
reforms,andbalancingtheinterestsofvariouspartiesarethekeytoundergoing
genuineassetrestructuring.
CulturalintegrationisalsoathornyissueintheM&Aprocess.Mostofthe
industrysmedium-andlarge-enterprisesarewell-established,withdistinctlocal
culturalcharacteristicswhichmarkeachenterprise.Althoughsomeenterprises
eventuallysolvethehigh-levelissuesinthemergingprocess,theyneglect
culturaldifferencesandintegration,oftenresultinginpopularrejectionbefore
thedealandresistanceafterwards,underminingtheefficiencyandresultsofthe
reorganisation.
GraspingopportunitiesthroughM&Atransactions
Thesuccessofanytransactiondependsoncarefulpreparation,planning,
implementationandpost-transactionintegration.
Preparationandplanning
Anacquiringcompanyshouldpreparecarefullyandthoroughlytodetectany
problemsearlyonsothattheycantimelysolveanyproblemsthatmayoccur
inafuturetransaction.Thequalityandquantityofinformationprovidedbythe
targetenterprisesusuallyhaveadirectimpactontheabilityoftheacquirerand
itsintermediarytofullyuncoveranyproblemsrelatedtothetargetassetsand
transaction.
Therefore,anacquirershouldfullycommunicatewithitstargetandurgeit
toensurethecompletenessandaccuracyoftheinformationitdiscloses.
Anacquirershouldalsofocusonmarketfactorsofpotentialimpactonthe
transaction,suchaswhichstageofthebusinesscyclethetargetisat,the
30
advantagesanddisadvantagesofM&Afortheacquirersstrategicdevelopment,
andwhetherthetimingofthetransactionisappropriate.
Financial,taxormarketingprofessionalsspecialisinginM&Aprovide
independentadviceandassistanceandperformduediligence.Basedon
theresultsoftheduediligence,anacquirercandetectpotentialrisksofthe
targetearlyintheprocess,oradjustthescopeandmannerofacquisition.Due
diligencecanuncovermajorissuesthathaveevenescapedtheattentionofthe
targetsmanagementordiscoverbusinessesundervaluedbytheacquirer.
Pricing
Pricingisthefocusofbothpartiesintheentiretransactionprocess.While
everyoneagreesthatthetransactionpriceshouldbesetatthetargetsfairvalue
oritsclosestvalue,potentialriskarisesaseachenterprisemayvaryintheir
determinationoffairvaluesandinterpretationoffinancialinformation.Majorrisks
thatrequirecautionincludethechoiceofvaluationmethod,thequalityofthe
financialforecasts,andthevaluationofcontingentliabilitiesandnon-operating
assets.
Accordingtointernationalpractices,forvaluation,theincomeapproach(e.g.
discountedfuturecashflows)andthemarketapproacharegenerallyconsidered
thebestmethodstomeasureanenterprisesfairvalue.Insometransactions,
acquireesmayuseothervaluationmethods.
Thequalityofthefinancialforecastscanvarygreatly.Chinasironandsteel
industryhasalowdegreeofconcentration,withmanyprivateenterprisesin
themarket,andthecapabilitiesoftheirfinancefunctionsdifferwidely.Some
enterprisesmaylackexperienceinpreparingfinancialforecasts.Othersmay
intentionallyprovideunclearormisleadingfinancialforecaststocounterparties.
Suchforecastinformationcouldinfluencetheoutcomeofadeal.
Privateenterprisestendtoundervaluecontingentliabilitiesandanticipated
liabilities(suchasoutstandinglitigations,environmentalobligations,and
31
dismissalwelfare)orincludenon-operatingassetsinthetransaction/valuation.
Chinasironandsteelindustryiscomparativelyloose,withproductionbases
dispersedthroughoutthenation.Provincesandcitiessetdifferentrules,so
enterprisesfinditdifficulttoidentifyallkeyundervaluedliabilitiesandovervalued
assets.
ToavoidtherisksassociatedwithM&A,bothtransactionpartiesneed
tounderstandeachothersvaluationbasisandengagetheassistanceof
independentthirdparties.Bydoingso,theycanbetterapplyvaluationmethods
generallyacceptedbytheinternationalcommunity,ascertainthecredibility
ofthetargetsfinancialforecasts,andimprovetheforecasts.Theycanalso
accuratelyidentifykeycontingentliabilities(e.g.environmentalobligations,
dismissalwelfare,etc.)andnon-operatingassetswithprofessionalassistance
by,forinstance,conductingduediligence.
Posttransactionintegration
Inmostindustries,post-transactionintegrationisfullofchallengeswhen
efficientandeffectiveprojectmanagementisthekey.Anticipatingpotential
problems,formulatingdetailedplansbeforethetransactionandimplementing
theplansimmediatelyafterthetransactioncansolvemanyproblemsinthe
processofintegration.
Somemeasurestohelpmitigatethecommonproblemswhichoccurduringthe
integrationphasecaninclude:
1.communicatingclearlywiththeacquireesemployees,customersand
supplierstodispeldoubts;
2.maintainingorenhancingmarketfocustobetterservecustomerneeds;and
3.mitigatingtheproblemofculturaldifferencesbetweentheacquiringand
acquiredcompaniesbystrengtheningcommunicationwiththeacquirees
generalemployees,andintroducingappropriateincentiveschemesforstaffto
helpreduceresistanceandfacilitateculturalintegration.
Theironandsteelindustryisacomplexnetworkcomprisingsuppliersand
customers.RestructuringthroughM&Acanhelpenterprisesimprovetheir
industrialstructuresandsupplychains,bringingeconomiesofscaleand
sharpeninginternationalcompetitiveness.Subsequenttoreorganisation,
theindustrycanupgradeitsproductiontechnologies,seekinnovationin
management,andenhanceresearchanddevelopmentcapacity.Theelimination
ofindustryunderperformersandlow-productivityequipmentthrough
competitionallowsformoreefficientallocationofresourcesanddivisionof
labourbasedonspecialisation.Productivityandeconomicbenefitsconsequently
increasewhiletheintegrationtakesfulleffect.Goodpost-dealintegration
effectivelyenhancesironoreandcharcoalbuyersbargainingpowerover
procurementprices.Theindustryalsostabilisesmarketpricesofironandsteel
byformulatingproductionplansinlinewithanticipatedmarketdemand,which
isbasedonthedevelopmentofrelatedindustries;forexample,realestate,
shipbuildingandautomobile.Furthermore,Chineseenterprisesacquireequityin
ironoresupplierstoensurestablesupplyandpricesofrawmaterials.
32
Developmenttrends
FromouranalysisofexistingM&AcasesofChinasironandsteelindustry,
andafterreferingtothecharacteristicsofinternationaldeals,weobservedthe
followingrestructuringtrendsforChinasironandsteelindustry:
Dominantpositionoflargeenterprises
Overall,thescaleofChinasironandsteelindustryissmallanddispersedat
thisstage.Administratively,state-ownedenterprisesareunderthecontrol
offivelevelsofgovernments,namelythecentral,provincialandmunicipal,
regional,countyandtowngovernments.Cross-regionalM&Ainevitablyaffects
relationshipsamongvariouslevelsofgovernment,enterprisesandstaff.
Therefore,anidealmechanismforcross-regionalM&Aisneededtocoordinate
andbalancetheinterestsofallparties,andarousetheirenthusiasm.Only
thenwilltheindustrysrestructuringpacepickup.Giventheindustryscurrent
conditionsandneeds,wecanexpecttoseeimprovementinthemechanism
inthenearfuture,withM&Aactivitiesvisiblyacceleratingundertheconcerted
effortofboththecentralandlocalgovernments.
Throughouttheindustry,largeenterpriseshaveadvancedandefficient
productionequipment,andhighproductioncapacities.Thesestate-owned
enterprisesareflexibleandresponsiveintheirmarketingstrategy.They
havethecombinedadvantagesofcapital,management,humanresources,
andtechnology,aswellasstrongcapitaloperationandfundleveraging
ability.Furthermore,theyenjoysupportfromthepoliciesofvariouslevels
ofgovernment.Hence,capitalisingthedominantmarketpositionoflarge
enterprisesisaguaranteeofsuccessinrestructuring.Overtheyears,making
themostoflargeenterprisesdominantpositioninM&Aactivitiesalwaysbore
fruitfulresults.
Theideaofcapitalisingthedominantpositionoflargeenterprisesemphasises
theassumptionofresponsibilitiesandobligationsbylargeenterprisesinthe
M&Aandrestructuringprocesstoensurethatallpresetgoalsareattained.
Theseresponsibilitiesandobligationsinclude:
improvingtherestructuredgroupsproductiontechnologies
seekinginnovationinmanagement
enhancingresearchanddevelopmentcapacity
33
allocatingresourcesmoreefficiently
dividinglabourbasedonspecialisation
eliminatingobsoleteandlow-productivityequipment
increasingproductivityandeconomicbenefits
satisfactorilysolvingvariouslegacyproblems
raisingemployeesincome
maintainingstabledevelopment.
CurrentbusinessmanagementcharacteristicsinChinashowthattheattitudes
ofenterpriseleadersarethekeytopromotingM&AactivitiesofChinese
largestate-ownedenterprises.Insomelargeenterprises,theirleadersown
managementapproachalsorestrictstheprogressofdealstoacertainextent.
Additionally,largesteelenterprisesemergingfromrestructuringcontinueto
implementtheexistingoverseasexpansionstrategy.Casestudiesofoverseas
mininginvestmentsbyWuhanIronandSteel,Baosteel,AngangandChinalco
showthatstate-ownedgiantswithabackgroundinChinawillbetheonly
choicestoimplementthestrategyofgo-outandcontrolresources.Thisis
whytheycaneasilygetsupportforvariousaspectsincludinggovernment
policiesandfinancialfundingandsuccessfullyacquireoverseasresources.
Restructuredenterprisescanallocateresourcesmorereasonablyoverawider
scope.Theycandeepenthedivisionoflabourbasedonspecialisationand
cooperation,andimprovelogistics,capitalflowandinformationflow,resultingin
professional,large-scaleoperationsandproduction.
M&A,inconjunctionwithotherrelocationandtransformationinitiatives,can
helptransferproductionbasestocoastalregionswithcomprehensiveresource
advantages,andimprovetheenvironmentofthecitiesoftheoriginalproduction
bases.Theyarealsoconducivetothedevelopmentoftherestructured
enterprises,enhancingtheircompetitivenessandeconomicbenefits,and,
eventually,drivingthegrowthofthelocalironandsteelindustrychain,andeven
thewholeeconomy.
34
EnhancedcooperationbetweenChineseandforeign
enterprises
Atpresent,Chinasironandsteelindustryisadjustingitsstrategy.Although
Chinaisalreadythemostimportantsteelproducerworldwide,thedomestic
industrystillencountersnumerousproblemsintermsofindustrydisposition,
productstructure,independentinnovation,energyconservation,andemission
reduction.ThisprovidesthegroundforforeigninvestorstoenterChinamarket.
State-ownedenterprisesgenerallydonotneedfundingsupportinM&A
activities,whilethecompletionofdealsbetweenprivateenterprisesmayrequire
capitalinjectiontoinvigoratefinancially-distressedcompanies.Astheindustry
facestheriskofslumpingfromitspeak,someprivatecapitaliscontemplating
pullingoutoftheindustry.Hence,M&Ainprivateenterpriseswilloffer
opportunitiesfortheentryofforeigninvestors.
Someambitiousstate-ownedenterprisesbringinforeigninvestorswitha
viewtosharpeningtheircompetitivenessbyacquiringadvancedtechnology
andmanagementexperience.Theyalsohopetoentertheinternationalmarket
moreeasilyandrapidlywiththehelpofforeigninvestors.Someenterprises
hopetoreduceobjectionsofforeigngovernmentstooverseasminingthrough
Sino-foreignjoint-ventureinvestment.Therearealargenumberofprivatelyrun
enterpriseswhichfaceaseriesofproblems,includingshortageoffunds,low
technology,andpoormanagement.Theappealofhigh-qualityforeigninvestors
isthereforeunderstandable.Chineseenterprisesaspirationsfordevelopment
willpresentopportunitiesforforeigninvestorstoenterthedomesticindustry.
Acceleratedcoastaldevelopment
ThecurrentbroadstrategyofChineseenterprisesistomoveto,andcluster
around,certaincoastalareas.AlongChinascoast,fromthenorthtothesouth,
productionbasesinLiaoningsBayuquan,HebeisCaofeidian,Zhanjiangand
FangchengPortareoperativeorunderconstruction.Thisillustratesthatunder
increasingpressureoverenvironmentalprotectionandawarenessoftheneed
tocontrollogisticscosts,ChinawillfollowJapanspattern,graduallymoving
competitiveproductioncapacitytothecoastalareastogiveenterprisesanedge
overtheirinlandcounterpartsinthecostsofenvironmentalprotection,landand
transportation.
Oftheseprojects,theinvestmentinphaseoneofBaosteelsZhanjiangproject
isexpectedtoreachRMB69billion,withthetotalinvestmentexceedingRMB
150billion.WuhanIronandSteelinvestsRMB62.5billioninphaseoneofthe
FangchengPortproject.Togetherwiththesupportingprojectsanddownstream
projects,theaggregateinvestmentsurpassesRMB92.5billion.Thecoastal
projectsinHuanghua,Jingtang,RizhaoandNanshawillhaveaproduction
capacityofover4milliontonnes,withatotalinvestmentofRMB20billionor
more.Givensuchmassive,fixed-assetinput,theprocessingandrawmaterial
marketswillbringtheindustrynewopportunities.
Privateenterprisesuniteamidcrisis
Privateenterpriseshavebeenhithardastheimpactoffinancialcrisishas
spread.Adiminishingmarket,exorbitantrawmaterialcosts,and,most
35
importantly,ashortageoffunds,havecausedbigbottlenecksinmanyrecently Chart8:Topfourironandsteel
establishedprivateenterprises.Fortunately,thestraightforwardshareholding productionbasesonthe
relationshipofprivateenterprisesmakesthemmoreflexibleinM&A.Large coastline
privateenterpriseshaveanirresistibleappealtosmall-andmedium-sizedprivate
enterprises(SMEs).Theselargeenterprisesseektoimprovetheirmanagement
throughrefiningtheirinternalmanagementstructure,andeventuallydevelopby
leapsandbounds.Toshieldthemselvesfromthecrisis,SMEsinthesamedistrict
seektounitewitheachotherandachieveaproductioncapacity,salesnetwork
andprocurementnetworkwhichareseveraltimestheirownscales.Whilesuch
jointrestructuringmaybemerelyaformality,itstillhasobviousbenefitsfor
SMEs,especiallyinunifiedprocurementandapplyingforcreditfinancing.
Morefinancingchoices
Amidthisfinancialcrisis,theprofitabilityofChinasironandsteelindustryhas
beenadverselyimpacted,andconcernsoverliquidityhavebeenrising.While
opportunitiesforM&Ahaveappeared,financingfortheseactivitiescontinuesto
beachallenge.
TheChinesegovernmentsupportsindustryrestructuringthroughM&A.In
additiontoadministrativemeasures,therelevantdepartmentshaveadjustedtheir
fiscalpoliciesandreleasedfinancingchannelstosupportandaidsuchdeals.
Enterprisesnowhaveaccesstomorefinancingsourcesotherthantheirown
capital.Forexample,somestate-ownedbankshavealreadylaunchedlending
businessestosupportM&A.
Zhanjiang, Guangdong
Caofeidian, Hebei
Yingkou, Liaoning
Fangcheng Port, Guangxi
TheAdjustments and Revitalisation Planning for the Iron and Steel Industry
providesguidancetoincreasefinancialsupporttoleadingironandsteel
enterprises.Specifically,itsupportsprojectsmeetingtheregulatoryrequirementsofenvironmentalprotection,landlaws
andinvestmentmanagementmeasures,aswellasenterprisesembracingM&A,restructuring,go-outstrategiesand
advancedtechnologytoissueshares,corporatebonds,medium-termnotes,andshort-termfinancingbills,obtainbank
loans,andabsorbprivateequityinvestment.Itpreventsleadingenterprisescapitalchainsfrombrokenbysubsidising
loaninterests,wherenecessary.Itcontinuestoimposerestrictivemeasuresontheprovisionoffinancingtounlawfuland
irregularconstructions,projectswithunauthorisedapprovalandenterpriseswithlowproductioncapacity.
Asarecentexampleofincreasedfinancialsupport,HebeiIron&SteelGroupandChinaConstructionBank(CCB)entered
intoastrategiccooperationagreementinShijiazhuang,Hebeiin2008,inwhichCCBagreedtoprovideacreditlineofRMB
50billiontothegroupoverthefollowingthreeyears.
30
Inaccordancewiththeagreement,HebeiIron&SteelGroup,asanimportantcustomerandalong-termbusinesspartner
ofCCB,willuseCCBasitsoriginatingbank.Giventhesameconditions,thegroupanditssubsidiariesshouldgivepriority
tousingCCBsfinancialproductsandservices.Wheretherelevantlawsandregulationspermit,CCBshouldgivepriority
toprovidingthegroupanditsmemberfirmswithhigh-quality,preferentialfinancialservicesforcomprehensivecredit
extension,cashmanagementandcapitaloperationservices.Thecreditlinegrantedintheagreementisapplicabletoloans
denominatedinrenminbiandforeigncurrencies,andtoothercreditservices.Specifically,thefinancingservicesinclude
fixedassetloans,tradefinanceforimportandexport,andliquidityloans.Initially,thegroupplanstousetheloansonareas
suchasadjustingitsproductstructure,exploitingminingresourcesandM&A.
30
China Metallurgical News,13January2009
36
Conclusionchallengesversusopportunities
Astheglobalfinancialcrisishasyettobottomout,difficulttimesstillawait
Chinasironandsteelindustry.Ifproblemssurroundingtheconcentration
oftheindustrystructure,industrydisposition,environmentalprotectionand
employmentarenotsolvedeffectively,theindustrysdevelopmentpacewill
slow,andtheopportunitiesmayslipaway.
On5November2008,Chinaintroducedtenmeasurestostimulatetheeconomy.
TheseriesofinvestmentplanswillbeworthRMB4trillionbytheendof2010.
FortheChinesemarketwhichisunderthethreatofthefinancialcrisis,these
measureswillhavedirect,positiveeffectsonboostingdomesticdemandand
stimulatingeconomicgrowth,aswellaspromotingstructuraladjustmentsin
industries.
Industryopportunities
PowerindustryChinaplanstoconstruct260,000kilometresoftransmission
lines(110kilovoltsandupwithatransformercapacityof1.35billionkilovolt/
amperes)inthenexttwotothreeyears.ThetotalinvestmentwillreachRMB1.1
trillion.
31
RailwayindustryTheindustryaimstocompleteRMB600billionworthof
infrastructureinvestmentin2009,surpassingthepresettargetofRMB50
billion.Originally,Chinaplannedtoapprovetheconstructionof10,000kilometres
ofnewrailwaysatacostofRMB1trillioninboth2009and2010.According
totherevisedplan,by2013(sevenyearsearlierthantheoriginalplan),the
industrywillcompletetheconstructiontargetof120,000kilometres,withannual
investmentdoublingtoRMB600billion.Thisimpliesanadditionalconsumption
of9milliontonnesofsteeleachyear.
32
RealestateindustryOveratimeframeofroughlythreeyears,Chinaisbuilding
over2millionlow-renthousingunitsandover4millioneconomyhousingunits,
withtotalinvestmentlikelytoreachRMB900billion.Itisexpectedtostimulate
nearlyRMB600billionofinvestmenteachyear.
33
EnergyindustryTheStateCouncilapprovedanaggregateinvestmentamount
ofRMB95.5billionfortheGuangdongYangjiangNuclearPowerProjectandthe
31
Xinhua News Agency,14November2008
32
Peoples Daily,11November2008
33
Shanghai Securities News,13November2008
37
QinshanNuclearPlantExpansionProjectinZhejiang,andRMB93billion
34
for
theeasternsectionoftheSecondWest-EastGasPipelineProject.Anumberof
energyinfrastructureprojectswillalsobelaunchedin2009,includingalargeoil
refineryplantinChengduwithaproductioncapacityoftensofmilliontonnes.
WaterindustryChinahasearmarkedRMB20billion
35
toacceleratewater
infrastructureprojectsin2008.
TransportindustryChinawillinvestRMB10billionintransportinfrastructure
projectsinthefourthquarter,andstrivetoraiseannualfixedassetinvestment
intransporttoRMB1trillioninthenexttwoyears.Expediteddevelopment
intransportinfrastructurenotonlydirectlyfuelsthedemandforconstruction
steel,butalsostimulatesthedemandforconstructionmachinery,including
engineeringmachineryandheavydutytrucks.Thiswillinturnincreasethe
demandformachinerysteel:about35percentto40percentofengineering
machineryinChinaisusedininfrastructureconstructioninareashitby
earthquakesandfloods.
36
Furthermore,oftheRMB4trillioneconomicstimuluspackageannouncedbythe
government,45percentwillbespentonrailways,highways,airports,urbanand
ruralpowergridtransformation.Thisisexpectedtodirectlystimulateabout90
percentofinvestmentinconstructionsteel,especiallyintransportandenergy
infrastructure,low-incomehousingprojectsandpost-disasterreconstruction.
Followingtheannouncement,governmentsatalllevelsproposedtheirown
measurestostimulatetheirlocaleconomies.Oninitialcalculations,these
investments,mainlyinconstructionandtheinfrastructuredevelopment
oftransportandenergy,willamounttoRMB18trillion.Pasteconomic
developmentinChinashowsthatboostinginvestmentismosteffectivein
promotingeconomicgrowth.Whileover-investmentcouldbringfreshproblems,
itseffectsonstimulatingeconomicgrowthisundeniable.Anexpansionin
investmentcandirectlyincreasesteelconsumption.Theconstructionof
railways,highwaysandotherinfrastructuresupportsthedomesticsteelmarket.
Constructionsteelaccountsfor54to55percentoftotalsteelconsumption.
Therefore,stabilisingtheconsumptionofconstructionsteelisanimportant
measureforrealisingthegoalsofthesteelmarket.
34
Caijing magazine,13November2008
35
Reuters,12November2008
36
Reuters,12November2008
38
Hitbythefinancialcrisis,theconsumptionofsteelfellbyapproximately20
milliontonnesin2008.IfChinadoesnotactivelyadoptvariousmeasuresto
revivetheeconomy,theconsumptionofsteelisexpectedtoplungetoaround
390milliontonnes.Thegovernmentspoliciesonmaintainingtheeconomic
growth,expandingthedomesticdemandandadjustingtheindustrialstructure
andtheireffectivenesswillstimulatethegrowthofsteelconsumptionby
differentdegrees.Initially,thedemandforsteelisexpectedtobebetween
416millionand438milliontonnes(or427milliontonnesonaverage)in2009.
Chinamayadoptmorevigorousmeasuresifthecrisisdeepens,whichwillbe
beneficialtothedomesticsteelconsumption.
Currently,theproductioncapacityofChinasironandsteelindustrytops500
milliontonnes.Asthemarketdemandslackensamidslowingeconomicgrowth,
over-productionseemsnowtobeaforegoneconclusion.
Asaresult,steelenterpriseswillsoonfacefiercermarketcompetition.The
hikeinproductioncoststhreatensenterprisessurvivalandhinderstheir
development.ItisalsoacompellingforcethatdrivesM&Aandprovidesroom
forrestructuring.Atthesametime,ruthlesscompetitionhasforcedvulnerable
enterprisestoeitherexitthemarketorenterintomergerswithenterpriseswith
moreassuredresources,advancedtechnologyandstablemarketsharesinorder
tosurvive.
IntheAdjustments and Revitalisation Planning for the Iron and Steel Industry,
thegovernmentpromulgatesadministrativemeasuresandpoliciestovigorously
supporttheindustrysM&Aactivities,openingupanumberofopportunities.
Largeenterpriseswithabundanthumanandfinancialresourcesoftentakethe
leadandplayimportantrolesinM&Aprojects.Intherestructuringprocess,
theengagementofprofessionaladvisoryserviceisconducivetosmoother
transactions.Italsohelpsenterprisesadoptagoodmanagementpatternand
enhancetheirpost-dealcompetitiveness.
Althoughnoteveryenterpriseenjoysthesameopportunityandchanceof
successinM&Asinthecurrentmarketenvironment,enterpriseshavemore
opportunitiestoparticipateintheM&AactivitiesinChinasironandsteel
industry,includingtakingpartinmergersandpost-mergermanagement;
improvingM&Aplanning;andoptimisingtheallocationofindustrychains.
WebelievethattheincreasedtrendofM&Aactivitywillnotbewithoutits
challenges,butwillhelptodevelopChinasironandsteelindustryintoamore
robustandwellbalancedindustrythatalsohasamuchlargerscale.
39
AboutChinaMetallurgicalNews
China Metallurgical News,withamastheadinscribedbylatePremierZhouEnlai,
wasestablishedinJuly1956.Thenewspaper,onceapartynewspaperofthe
formerMinistryofMetallurgicalIndustry,isnowrunbytheChinaIronandSteel
AssociationundertheleadershipoftheState-ownedAssetsSupervisionand
AdministrativeCommissionoftheStateCouncil.Thenewspaperfocuseson
reportingthedevelopmentandtrendsofthemetallurgicalindustry.Currently,the
newspaperreachesallsteelproducersandrelatedenterprises.Itssubscription
baseisontheriseandhashadapeakcirculationof320,000.
Thenewspaperisstillcommittedtoprovidingusefulandmeaningfulnews
reportsandeconomicinformationtoserveChinasironandsteelindustry,and
relatedupstreamanddownstreamindustries.Itcontinuestoexpanditscoverage
andservicestopromotebothsoundandfastdevelopmentofdomestic
metallurgicalindustryunderasocialistmarketeconomy.Thenewspaperis
highlyregardedbytheindustry,governmentdepartmentsandacademiaand
well-knowninternationally.ThroughawindowprovidedbyChina Metallurgical
News,globalanddomesticironandsteelindustriescanvieweachothers
developments.
40
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China's Iron and Steel Industry Amid The Financial Crisis: Industrial Markets

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China's Iron and Steel Industry Amid The Financial Crisis: Industrial Markets

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I NDUSTRI AL MARKETS

2005 2006 2007

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