China's steelmaking giamts seek new strategies after huge slump in sales and profits

Chinese steel makers are anxiously pursuing ways to reinforce their dominant global position in the industry after a year in which their profits dived and European tariffs on their products and raw material prices rose sharply.

Total profits of 1.58 billion yuan ($254 million; 190 million euros) recorded by China's steel giants last year was down a thumping 98.2 percent from 2011, the China Iron and Steel Association says.

The association's vice-chairman, Shen Wenrong, says the industry was going through "the toughest period since we were founded in 1975".

Most steel companies in China reported decline in profits or losses mainly due to falling demand and the rise in raw material costs.

Anshan Iron and Steel Group Corporation, one of the country's top steel producers, reported a 1.19 billion yuan loss in the third quarter, a daily loss of more than 13 million yuan. In the corresponding period in 2011, the company had a net profit of 239 million yuan.

CISA says the major large and medium-scale steel companies in China reported total losses of 5.53 billion yuan in the first three quarters, the worst since 2000.

China's steel industry now has problems with overcapacity and a limited range in mostly upstream, crude-steel products as required by the country's continuing infrastructure construction, and there is a shortage of advanced products with high added-values, says Xu Xiangchun, senior analyst at Mysteel.com, a Shanghai-based industrial information provider.

Also, because of rising iron ore prices in recent years, many Chinese steel companies decided to expand their business in mining operations overseas, aiming to improve competitiveness and save on raw material costs. But this has not been as effective as hoped.

So China's steel producers are collectively showing their mettle through consolidation and other new strategies designed to maintain, if not reclaim their edge.

Kim Yong-min, president of Zhangjiagang Pohang Stainless Steel Co Ltd - a joint venture set up in 1999 by the Korean company POSCO and Jiangsu Shagang Group, China's largest private steel maker - says there was a time when whatever they produced would sell because of the huge demand in the Chinese market.

"But now the situation has changed and the producers have taken measures, such as moving up the value chain to combat the bleak market."

As well as trying to expand the overseas market, Chinese steel makers are focusing more on producing steel products for use in vehicles and on developing steel-related industries.

CISA secretary-general Zhang Changfu said at an annual industry conference last month in Beijing that steel prices were low for much of last year due to sluggish economic growth.

He predicted raw material costs would continue to be high, but downstream demand for high-end steel products would grow slowly this year.

Not surprisingly, Chinese steel manufacturers have been more active on the international stage lately, hoping to make up for the downturn in the home market.

Taiyuan Iron and Steel Group Co Ltd, the world's largest stainless steel producer by output, aims to increase exports by 52 percent to 500,000 tons this year.

The group is expected to record total revenue of about 130 billion yuan, with 380 million yuan in profit, for 2012, and plans to gain revenue of 140 billion yuan and a profit of 500 million yuan this year.

The company has annual production capacity of 3 million tons of stainless steel products.

Tangshan Iron and Steel Group Co, a subsidiary of China's largest steel maker, Hebei Iron and Steel Group, is also expanding its overseas business.

Tangsteel reported a profit of 260 million yuan for the first 10 months of last year, with 1.4 million tons in exports to more than 150 countries.

Sun Junxue, a spokeswoman for Tangsteel, says the company started selling its products overseas for automotive use in 2009 and had doubled its volume of that year in 2012.

The company is not solely focused on expensive high-end manufacturing equipment and production lines, says Yu Yong, general manager of Hebei Iron and Steel Group.

He says that the group's strategy is to improve the quality of existing products and make them market leaders, be it for use in vehicles, construction or in home appliances.

Although there will continue to be new opportunities overseas, Chinese manufacturers are facing another hurdle in increased tariffs on their products.

Last month, 27 EU member countries voted to support a European Commission proposal to add duties to Chinese coated-steel products, because they were "receiving illegal government subsidies".

It was the first time the EU had penalized China for alleged government subsidies. The duties imposed will be as high as 45.5 percent. A 12 percent tariff was imposed on Chinese coated fine paper two years ago.

Together with "dumping duties", the total tariff on Chinese coated-steel products entering the European market stands at 58.3 percent.

China's steel companies therefore are looking to place more emphasis on quality rather than quantity, and are considering adjusting their products mix from low-end to high-end, and developing business in multi-sectors, such as steel used in vehicle manufacturing.

Other companies, however, are considering developing steel-related businesses to counter the slowing steel industry growth.

CISA vice-chairman Shen is also chairman of China's largest private steelmaker, Jiangsu Shagang Group, and he has been pushing ahead with construction of a steel logistics park in Zhangjiagang, East China.

"This will be critical in helping reduce transport costs and integrating steel-related industries," he says. "Because the domestic steel market is struggling, it is crucial that we push ahead with these changes now.

"In the past 30 years, stimulated by the fast development of China's economy and huge infrastructure and property investment, China's steel industry has grown rapidly."

But, he adds, because of this fast growth, the ability of steel logistics companies to provide services has lagged far behind that required to meet the demands of the domestic steel industry.

Compared with other countries, such as Germany, logistics costs in China are about 400 yuan higher per ton and are a huge burden on domestic steelmakers, he says.

Zhang Li, general manager of Jiulong Steel Logistics, who is also responsible for developing the park, says the 30 billion-yuan project will be built in two main stages.

Begun early last year and due to be completed by 2015, the first stage of the park focuses on building the logistics services facilities for steel products, including centers responsible for inventory, cutting, pre-processing and distribution.

Work is expected to start this year on the second stage, which is mainly for raw materials, and be completed by 2017.

Companies in the park are expected to reach sales of 250 billion yuan within five to eight years, Shen says.

But the park development faces many challenges, analysts say.

Liu Zheng of Citic Securities of Beijing says that China, being the largest steel producer, cannot learn from any other country, because there is no other steel logistics park as big.

"The transformation (of the industry through the logistics park and emphasis on auto-steel and high-end products) is painful and somewhat sad for the domestic steel makers as a whole, yet it is useful and critical," Liu says. "As the industry becomes more consolidated, only those who can transform themselves can survive and prosper in the fierce competition."

Contact writers at huhaiyan@chinadaily.com.cn and dujuan@chinadaily.com.cn

(China Daily 02/22/2013 page10)