Analysis: New Opportunities for China's Steel Industry

Chinese steel enterprises will get through the most difficult time and solve the long-existing problems in the industry with the latest support package announced by the State Council on Wednesday Industry expert believed that the support package will help relief the industry's overcapacity, promote technological innovation in steel plants, accelerate industry restructuring, improve standards for building steels, speed up the introduction of steel futures and further adjust import and export duties for steel products.

However, some analysts pointed out that the actual effect of the support package depends on how local governments will implement the policies under the package.

On Wednesday, China's State Council unveiled the long-awaited support package for the auto and steel sectors to boost the two "pillar industries." The plan requires accelerated upgrading of the steel sector, transforming "big" industry competitors into "strong" international players. The government urges the industry to eliminate outdated technology, and not to establish new projects that merely add to steel output.

Actually, China's steel industry launched a round of industry reshuffle in 2008 in an effort to relieve itself from the irrational price slump triggered by the global financial crisis.

Under the plan, the government will strive to increase domestic demand for steel and adopt a more flexible tax rebate policy to keep international markets. Moreover, special funds will be allocated from the central budget to promote technological advancement of the sector, readjustment of products mix and improvements of product quality, according to the plan.

-- Reshuffle of China's Steel Industry in 2008

In 2008, China's steel industry accelerated its pace in an industrial reshuffle amid the economic slowdown and under encouragement from the central and local governments. The following are moves by Chinese steel titans.

Shandong Iron & Steel Group

In March 2008, Shandong Iron & Steel Group was formed on the consolidation of Jigang Group and Laigang Group, parent of Lai Steel (600102.SH), two state-owned steel plants located in east China's Shandong province, with a registered capital of 10 billion yuan.

The group plans to integrate other small and midsize steel plants in Shandong province, the third largest steel producing province in China. Currently, recapitalization of Rizhao Steel is in process.

Meanwhile, the province will remove underperforming production capacity gradually, according to the provincial officials.

Hebei Iron & Steel Group

In June 2008, Hebei Iron & Steel Group was founded atop 10 subsidiaries, among which Tang Steel and Hansteel were the largest.

The group, located in Hebei province, China's leading steel province, manages an overall production capacity of over 31 million tons per year, more than China's top steel maker Baosteel Group, the parent company of Baosteel .

In late December, Tang Steel announced to take over Hansteel and Chengde Vanadium & Titanium through a stock swap, after which Tang Steel will reach an annual output of 30 million tons, the most in China.

Baosteel Group

Between March and June of 2008, China's top steel maker Baosteel Group, the parent company of Shanghai-listed Baosteel (600019.SH), acquired and recapitalized Guangzhou Iron & Steel Enterprises Group and Shaoguan Steel, both located in southern China's Guangdong province.

Based on the acquisition, Baosteel established a new company, Guangdong Iron & Steel Group, in Guangdong province.

Meanwhile, Baosteel and Guangdong province jointly launched a large-sized project in Zhanjiang city of Guangdong province to produce high-quality steel products. Through this project, Guangdong province plans to remove obsolete backward steel production capacity of 10 million tons.

Baosteel Group plans to increase its annual output to 80 million tons by 2012 through merger and acquisitions.

Wuhan Iron & Steel Corporation

In September 2008, Wuhan Iron & Steel Corporation in central and southern China, parent of Wugang Steel, acquired Liuzhou Iron & Steel Group, parent of Liugang Steel in south China's Guangxi province and established a new company, Guangxi Iron & Steel Group.

The new company now leads the 10-million ton per year Fangcheng Port project, with a total investment of 68.6 billion yuan.

Hebei Iron and Steel Group

On December 30 2008, China's Tang Steel announced a plan that it will take over Hansteel and Chengde Vanadium & Titanium through a stock swap.

The three listed companies are all subsidiaries of Hebei Iron & Steel Group. Analysts say the takeover is the first step of the Group's whole-listing process.

After the stock swap, annual crude steel output of Tang Steel is estimated to exceed 30 million tons, the most in the country, making Hebei Iron and Steel Group the largest steel maker in China.

-- Performance of China's Steel Industry in 2008

China's iron and steel enterprises weathered the cold winter's irrational price slump which was triggered off by their competitive sales since the iron and steel market stepped into downward orbit.

In this economic cycle, demand for steel products in both Chinese and international markets has shrunk greatly, partly owing to downstream industries such as the automobile, household appliance and construction which all suffer from depression and weak market demand.

Moreover, Chinese steel plants competed to expand production capacity before this economic cycle and currently suffer from overstock. China's domestic steel market will focus on disposing products left in stocks from the end of 2008 to early 2009, said analysts.

Many steel plants, including industry giants such as Baosteel, Wugang Steel and a number of small and midsize ones, have shut down part or all of their production lines on soft demand and heavy stock.

Under fierce competition among the numerous steel plants in China, steel product prices have been decreasing sharply, some even below costs.

In October 2008, China's steel industry saw the first monthly net loss, amounting to 5.835 billion yuan, for 71 major steel plants as a whole since the beginning of the current economic cycle. Among them, 42 out of the 71 steel plants were in the red, with combined losses of 7.774 billion yuan.

In November, the figure increased to 12.77 billion yuan, with 48 steel plants in the red with a combined loss of over 14 billion yuan.

Meanwhile in November, steel export volume decreased 1.67 million month on month to 2.95 million tons, the lowest monthly figure this year. Further, steel product imports in November dropped 15 percent year on year to 1.03 million tons and iron ores import totaled 32.52 million tons, down 8.3 percent year on year.

In late December, part steel plants began resuming production on the slight market warming. Baosteel and several other steel giants have raised their product prices for February 2009 by a small margin. However, market analysts say, the rewarming is periodic since downstream demand isn't in real recovery; and the market will focus on disposing stocks during the first half of 2009. The market may warm up in the second half of the year as a government economic stimulus package will begin to take affect.

-- Necessity for Reshuffling China's Steel Industry

China's steel industry is suffering great losses in the current economic cycle, owing to low industry concentration.

As the world's largest iron ore buyer, China's steel industry only enjoys an industrial concentration of 42.6 percent, with over 1000 large, small or midsize steel plants. The world's major iron ore suppliers are Companhia Vale do Rio Doce (CVRD), BHP Billiton and Rio Tinto, which dominate 70 percent of the global maritime trade volume. Under such imbalances, China's steel plants are greatly disadvantaged in annual international iron ore negotiations.

During the 2008 iron ore negotiations, China had to sign long-term agreements with BHP Billiton and Rio Tinto with iron prices up 85 percent since last year. Analysts estimated that China's steel industry paid 100 billion yuan more due to the price rise in the 440-million-ton imported iron ores of 2008.

In order to expand production capacity and gain a market edge, Chinese steel plants competed to hoard iron ore, purchasing 90 million tons of high-priced iron ore. Over the following iron ore price slump, the overstock cost them an accumulated losses of around 35 billion yuan.

In the second half of 2008 when the Chinese steel market began slipping, steel plants competed again through cut-throat stock disposals, creating an irrational price slump in the Chinese steel market and leading the whole industry to the current situation of net losses.

-- Favorable Conditions for China's Steel Industry Reshuffle

The current economic slowdown of China's steel market has brought great losses to Chinese steel plants, but is also a providing a good chance for the industry to step up industrial consolidation.

Analysts say the recession will make strong enterprises stronger while backward production capacities will become obsolete through market competition.

In addition, the stock prices of a number of listed steel enterprises have dropped below their net assets, which will stimulate large steel plants to conduct merger and acquisitions.

Meanwhile, the government is showing its determination and support in reshuffling the steel industry.

At the Central Economic Work Conference, "accelerating merger and acquisition among enterprises" was listed as a major economic task for 2009. And Minister of Industry and Information Technology Li Yizhong made it clear that the government will take measures to support the steel industry.

In early December, China Banking Regulatory Commission (CBRC), the country's top banking regulator, announced it would grant commercial banks the right to provide loans to domestic enterprises conducting M&A in an effort to meet the mounting demand for funds. Analysts say this policy will mainly benefit such industries as the steel, power, real estate and nonferrous metals. Under this policy, Shandong Iron & Steel Group has received a total credit line of over 110 billion yuan from three major Chinese banks, providing enough money for it to recapitalize Rizhao Steel Company.

-- Directions for China's Steel Industry Reshuffle

As related government officials said, China's steel industry reshuffle will focus on structural adjustment rather than scale expansion, with the aim to make the industry bigger and strongerAccording to analysts, the industry reshuffle will concentrate on assets and equity restructuring, unlike the previous loose coalition among steel plants; there will be more mergers and acquisitions among steel plants in different provinces and cities; market share and resource coverage will be the major assessment criteria for the acquisition targets.

The current economic cycle has pushed and also serves as a good chance for China's steel industry to step up its pace in the industry reshuffling. Both the government and the steel plants have showed their determination in this industry reform. However, it's still a long way for China's steel industry to go.