Chinese Iron and Steel Industry: Large-Scale Mergers to Ease Overcapacity
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Chinese Iron and Steel Industry: Large-Scale Mergers to Ease Overcapacity
01
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease
Overcapacity
Written by Yichen Mao yichen.mao@uzabase.com 2016/3/23
Industry Highlights
Industry Suffering from Overcapacity, Push to Strengthen Exports
China’s iron and steel industry is facing a harsh winter due to overcapacity and
falling product prices, with experts calling for a boost in mergers and export
activity in order to resolve these issues. However, the progress of mergers and
reorganisation has essentially been precluded by local governments that are
burdened with massive debts, and the export trade— although well-supported by
government policy— has encountered backlashes against anti-dumping from
overseas markets.
Companies Move toward Consolidation and Mergers
Despite the corruption in local government, it is anticipated that, in tandem with
global trends, a number of large-scale mergers and acquisitions among Chinese
iron and steel manufacturers will take place over the period of 2015–2020. As the
market becomes consolidated, it is likely that production will be concentrated
towards the coastal region, with the emergence of two to three conglomerates in
Northern and Eastern China.
Aiming for Domestic Supply of High-End Products
The automobile and energy resource industries will gradually replace the
construction industry— which currently holds a roughly 60% market share— to
become the largest sources of demand for steel materials. At present, high-end
industries are dependent upon imports of special alloys of the kind that are often
used in facilities such as nuclear power generators. The establishment of a
stronger system for technological research, development, and management
should enable the supply of such materials in future.
Chinese Iron and Steel Industry: Large-Scale Mergers to Ease Overcapacity
02
Catalogue
Background p.3
Macroeconomics of China p.4
Basic Policies and Principles of the Xi Government p.5
Beijing’s Two Biggest Concerns p.6
Analysis – Chinese Iron and Steel Industry p.7
Classification and Value Chain p.8
Policy Trends p.9
Major Tasks and Issues p.10
Production Areas: Characteristics and Trends (Map Attached) p.12
Finding the Way Out: Exports and Minor Boost of Domestic Demand p.17
Elimination of Overcapacity by 2020 p.20
Involvement in Global Merger Trends p.22
Speculation of Local Governments and Enterprises p.23
Industry Players (Attachment) p.24
Companies Accelerating Entry into Overseas Markets Despite Anti-dumping Measures p.26
Steel Material Prices Dropping, Likely to Plunge Even Faster p.34
A Harsh Winter for the Industry: From the Perspective of Revenue Model p.38
Eastern China: Product Unit Price Relatively High, Expected to Recover Soon p.40
Steel Material Exports Increasing, While Imports are Sluggish p.41
Looking Ahead: Future Trends p.42
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
03
Background
○ Macroeconomics of China
○ Basic Policies and Principles of the Xi Government
○ Two Major Current Issues: Overcapacity in Major Industries and Swelling Debts Held by Local Governments
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
04
Macroeconomics of China
In 2010, China was ranked second in the world in terms of GDP. However, its
GDP per capita remained low at USD 7,750 (as of 2014) and is equivalent to that
of mid- to low-income countries, exhibiting the gap with OECD countries.
There is a significant gap in economic development between coastal regions
(including special economic zones) and inland regions, with China’s top 30 cities
by GDP accounting for almost 50% of the country’s total GDP. Evening out these
regional differences is one of the major tasks for the Chinese government.
The figures of each key index disclosed by the Chinese Academy of Social
Science are either falling year-on-year or growing by a very small amount.
Although these figures are said to be “adjusted” to fit government targets, they
nonetheless demonstrate an economic slowdown in the market.
The reorganisation of China’s iron and steel industry has been drawing
worldwide attention because it is related to a multitude of industries including
infrastructure construction, machinery and equipment, shipbuilding,
automobiles, and household appliances.
Finally, it is important for industry observers to pay close attention to the Xi
government’s upcoming 13th Five-Year Plan (2016–2020). Such policies have a
substantial influence on industry development in China.
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
05
Basic Policies and Principles of the Xi Government
Doubling Both GDP and Income per Capita in Rural and Urban Regions by 2020 from 2010
The Chinese government under the previous Hu-Wen Administration (2003–
2012) revised its economic development framework from “a stabilised and
relatively rapid growth” to “a sustainable steady growth”, and reduced its target
average annual GDP growth rate from 10% to 7%, pulling itself out of its
number-obsessive focus on double-digit growth.
*The Chinese government has been extraordinarily resolute in its commitment to show 7% GDP growth, using obscure calculation methods to do so. Therefore, there are some economists who claim that China’s 7% GDP growth is essentially 0% in OECD countries, and anything below 7% indicates a negative growth.
The Chinese government has also attempted to shift its economic development
focus from export and investment to domestic demand, under which
investment, consumption, and exports play equal roles.
Improving Livelihood Stability and Promoting Urbanisation in the Mid- to Long-Term (By 2020)
The Chinese government aims to improve livelihood stability and achieve
economic recovery through boosting construction of indemnificatory housing
for low- to mid-income households and exploring further development of its
urbanisation projects, under which six new districts (to be directly administered
by the central government) will be established.
China’s market mechanisms will undergo structural reform, wherein large-scale
government expenditure will be curbed to restrain the country’s swelling debts
and industrial sectors such as railway investment will make efforts to lure more
private capital.
The Belt and Road Strategy, together with the establishment of the Asian
Infrastructure Investment Bank (AIIB), will be conducive to enhancing China’s
influence within Asia and prevent the country from becoming isolated. It will
also help to export China’s excess production capacity.
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
06
Beijing’s Two Biggest Concerns
Overcapacity in Major Industries
It is believed that China’s current overcapacity crisis can be attributed to the
CNY 4 trillion economic stimulation package that was launched in 2009.
In addition to the iron and steel industry, other industries such as cement,
shipbuilding, and solar power panel manufacturing are also facing similar
overcapacity issues.
The government has taken initiatives to combat this by discarding ageing and
outdated facilities, prohibiting manufacturers from blind expansion of their
production scales, and attempting to streamline the industry through
consolidation.
However, the issue of overcapacity remains unresolved, with a large number of
companies in the iron and steel industry showing blatant disregard for the
central government’s orders and continuing to increase their output capacity.
Regional Issues
On a regional level, there are issues such as the accumulation of debt by local
governments, environmental pollution (air, soil, and water) due to the
abovementioned blind expansion in the industry, and regional unbalances in
economic development.
In addition, trends such as a decreasing population and unfavourable sales of
real estate have become increasingly significant in Tier 2 and 3 cities as youths
are leaving their hometowns.
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
07
Analysis – On China’s Iron and Steel Industry
○ Industry Overview: Classification and Value Chain
○ Industry Overview: Policy Shift
○ Industry Overview: Major Tasks and Issues
○ Production Region Characteristics: Concentration in Northern and Eastern China
○ Production Region Characteristics: Shift Towards Riverside and Coastal Regions
○ Market Trends: Finding the Way Out: Minor Boost of Domestic Demand and Exports
○ Market Trends: Elimination of Overcapacity by 2020
○ Potential of Merger: Global Merger Trends
○ Potential of Merger: Speculation of Local Governments and Enterprises
○ Potential of Merger: Industry Players (Attachment)
○ Market Trends: Companies Accelerating Entry into Overseas Markets Despite Anti-dumping Measures (Attachment)
○ Market Trends: Steel Material Prices Dropping, Likely to Plunge Even Faster
○ Market Trends: Industry Facing Harsh Winter from the Perspective of Revenue Model
○ Market Trends: Eastern China Expected to Recover Sooner than Northern China
○ Market Trends: Steel Material Exports Increasing, While Imports are Sluggish
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
08
China’s Iron and Steel Industry – Industry Overview
Classification and Value Chain
Crude Steel Classification
Based on ISO4948/1 and ISO4948/2, the former National Technology Inspection
Bureau (currently AQSIQ) stipulated and implemented GB/T13304-91 pertaining
to steel classification in 1991. Depending on steel composition, crude steel is
classified into four categories—non-alloy steel, low-alloy steel, alloy steel, and
stainless steel. Note that the General Administration of Customs of the People’s
Republic of China (the Customs) collects data for stainless steel separately due
to its importance.
Value Chain
As shown below, one tonne of crude steel is made from 0.92 tonnes of raw iron,
0.15 tonnes of iron scrap, and 0.02 tonnes of iron alloy.
By demand, the construction materials and machinery (including working tools
and equipment) industries accounted for a high share of the market at 54.7%
and 19.5%, respectively, in 2014. The automobile industry, which is believed to
be latent in growth, followed with a share of 6.5%.
China Iron and Steel Industry Value Chain
Source: Uzabase
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
09
China’s Iron and Steel Industry – Policy Trends
Influence from Policies
In China, it is not uncommon that government policies have a great impact on
an industry’s development course. The iron and steel industry is no exception,
being directly affected by the policies shown below.
Major Policies for Iron and Steel Industry
12th Five-Year Plan 13th Five-Year Plan
*Adjustment Plan for the Iron and Steel Industry
Content
- Comprehensive reorganisation of steel manufacturers - Strengthening R&D of high-technology materials
- Leading manufacturers taking predominance and forming market order through reorganisation - Effective utilisation of iron scrap - Improvement in energy-saving development and diminishing environmental pollution
Numeric Targets
- Top 10 companies’ output of crude steel should account for more than 50% of industry total by 2010 - Decrease output of steel to shift focus to high-intensity, erosion-resistant, and high-tech materials (as of 2011 products that meet advanced global standards accounted for less than 30% of total output) - Increase R&D expenses (R&D expenses of companies above the designated size should amount to 1.1% of their main business revenue; global average: 3%)
- Top 10 companies’ output should account for at least 60% of industry total by 2025; form 3–5 steel manufacturing conglomerates that have international competitiveness - Streamline collection, process, and distribution; increase the utilisation rate of iron scrap to 30% by 2025 - Decrease energy consumption to 560kg (converted into coal), water consumption to 3.8 cubic metres or less, and sulphur dioxide emission to 0.6 kg per tonne of crude steel output by 2025 - Improve productivity of major and mid-sized steel manufacturers to 1,000 tonnes/person and above, and that of advanced manufacturers to 1,500 tonnes/person and above - Increase R&D expenditure share to 1.7% and above - Increase penetration rate of Manufacturing Execution System (MES) to 80% and above - Generate sales from e-commerce with a share exceeding 20%
Achievement
- Reorganisation failed - Top 10 companies’ output accounted for 33.6% of industry total as of 2014 - Decrease in output failed - CNY 4 trillion economic stimulus package led to a flood of small- and medium-sized iron and steel mills in this industry
N/A
Institution of Disclosure
Ministry of Industry and Information Technology Ministry of Industry and Information Technology
Year of Disclosure
2005 2015
Source: by UZABASE based on various materials
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
10
China’s Iron and Steel Industry – Major Tasks and Issues
Chinese Iron and Steel Industry Reform: Major Remaining Tasks and Issues After the Twelfth Five-Year Plan
Tasks Issues
Overcapacity - Output capacity enhanced at a faster pace than reduction
Local governments extending support to local manufacturers
Streamlining and Reorganisation
- Standstill of integration progress Failure of mergers and acquisitions: Anshan Iron & Steel (CHN) and Benxi Steel (CHN); Baosteel (CHN) and Wuhan Iron and Steel (CHN); Hebei Iron & Steel (CHN) and local enterprises
- Strong reluctance from local governments (refer to the graph below about the situation in Hebei Province)
- Because SMEs play an important role in tax payment and providing job opportunities in local regions, governments tend to act behind the scenes to hamper the progress of mergers and acquisitions
Elimination of Ageing Facilities and Concentrated Introduction of New Facilities
- Deteriorated performance of major steel manufacturers
Energy-Saving and Emission Reduction
- Administrative punitive measures insufficient - Many SMEs maintain or even increase their energy consumption after paying a small fine - Back-scratching alliances between law enforcement bodies and local enterprises are not
uncommon, so actual punishment on manufacturers is negligible
Source: by UZABASE based on various materials
Source: Uzabase
11974.36
2869.04 2704.51 2439.38 2377.01 2126.5 2088.36 1936.79 1760.14 1610.64
0
2000
4000
6000
8000
10000
12000
14000
Iron
and
Steel
Po
wer G
eneratio
n
Co
al Min
ing
Metal P
rod
ucts
Ch
emical M
aterials and
Pro
du
cts
Pe
troch
emicals
Pro
cessed
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Pro
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etallic Ore P
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Electrical Ap
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0,0
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Hebei Province: Output by Industry (2013)
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
11
It has proven difficult to enforce the reduction of production output and
stimulate M&A activity in Hebei Province. The reason for this is twofold: one,
because the iron and steel industry accounts for more than 25% of the region’s
total industrial output; and two, because 75% of steel manufacturers in the area
are state-run companies.
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
12
Chinese Iron and Steel Industry – Major Tasks and Issues
Since 2006, China has been gradually discarding ageing and outdated
equipment and closing down SMEs in an attempt to curb the output capacity of
the iron and steel industry.
However, despite such efforts in the elimination of outdated equipment, output
reduction has not been progressing as planned due to the number of enduring
small- and medium-sized iron and steel mills in Northern China and the
successive openings of new iron manufacturing plants in coastal regions.
Note that the overall statistics may not be highly accurate because the industry
lacks concentration and there are a large number of SMEs that have joined the
China Iron and Steel Association (CISA).
Output Reduction Plan and Results
Policy 12th Five-Year Plan 13th Five-Year Plan
Period 2011–2015 National People’s
Congress (2008–2012)
2016–2020
Targets
Iron: To reduce capacity by 48 million tonnes
Steel: To reduce capacity by 48 million tonnes
N/A
Results
As of 2011: Iron: reduced 31.92
million tonnes Steel: reduced 28.46
million tonnes
Iron: reduced 117 million tonnes
Steel: reduced 78 million tonnes
N/A
Trends of SMEs & Forecast
Local SMEs keep expanding and continue to increase output
Difficult to control SMEs because they remain unorganised
Credit crunches in local banks will lead to successive bankruptcies
Source: CISA
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
13
Chinese Iron and Steel Industry – Production Regions and Characteristics
Northern and Eastern China Predominant Production Regions, Accounting for Almost 70% of Overall Output
Northern China, centred on Hebei Province, and Eastern China, represented by
Jiangsu Province and Shanghai, are outstanding in terms of steel output.
Combined, they account for roughly 66% of overall output, highlighting the
concentration of the industry. By province, Hebei Province holds the largest
share of 25.34%, with its output standing at 165.54 million tonnes. It is followed
by Jiangsu Province (10.08%, 65.85 million tonnes), Liaoning Province (8.29%,
54.20 million tonnes), and Shandong Province (7.56%, 49.40 million tonnes).
Looking at the top five production regions, their combined share on a volume
basis has increased from 20% in 2000 to more than 55% as of end-2014 (latest
statistics), indicating a trend towards concentration.
Output Capacity by Region
Region Output Capacity (10,000 tonnes)
Share (%)
Northern China 23,554 36.05
Eastern China 20,145 30.84
Northeast China 6,760 10.35
Southern China 8,300 12.71
Southwest China 4,175 6.40
Northwest China 2,390 3.65
Total 65,324 100.00
Source: CEInet
0
20,000
40,000
60,000
80,000
100,000
10
,00
0 t
on
nes
China: Crude Steel Output by Region
Hebei Liaoning Jiangsu Shandong Shanxi Nationwide
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
14
Chinese Iron and Steel Industry – Production Regions and Characteristics
Continued Shift of Facilities Towards Riverside and Coastal Regions
In addition to the opening of new production plants in coastal regions as
mentioned above, there has been a steady shift towards and expansion of
facilities in riverside and coastal regions. As of end-2014, riverside and coastal
regions recorded a combined crude steel output of 121.7 million tonnes,
accounting for 17.4% of the national total (refer to Table A). Moreover, adding
up the 95 million tonnes of output by production plants that had been
approved to move to riverside and coastal regions by September 2009 (refer to
Table B), it is estimated that at least 30% of national output will be shifted
towards riverside and coastal regions in the future.
Table A
Company Output Capacity (10,000 tonnes)
Port
Jiangsu Shagang 2,200 Jiangsu Port along the Yangtze River
Baosteel 2,000 Pudong Port
Wuhan Iron & Steel 1,700 Jiangsu Port along the Yangtze River
Ma’anshan Iron & Steel (Magang) 1,700 Jiangsu Port along the Yangtze River
Shougang Jingtang United Iron & Steel 1,000 Caofeidian Port
Rizhao Steel 1,000 Port of Rizhao
Nanjing Steel 700 Jiangsu Port along the Yangtze River
Anshan Iron & Steel 600 Port of Bayuquan
Handan Zongheng Iron & Steel 560 Huanghua Port
Ningbo Iron & Steel 400 Port of Ningbo
Tangshan Heavy Plate 160 Jingtang Seaport
Tangshan Delong Steel 150 Jingtang Seaport
Total 12,170
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
15
Table B
Company Capacity of Facilities to be Shifted Port
Tangshan Guofeng Iron & Steel 3,000 Caofeidian Port
Baosteel 2,000 Zhanjiang Port
Xinjing, Puyang, Wenfeng 1,500 Huanghua Port
Nanjing Steel 1,000 Port of Lianyungang
Shandong Iron & Steel 1,000 Port of Rizhao
Wuhan Iron & Steel 1,000 Port of Fangcheng
China Minmetals 300 Port of Yingkou
Total 9,500
Source: askci.com
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
16
Chinese Iron and Steel Industry – Production Regions and Characteristics
Map of China’s Iron and Steel Manufacturing Sites
Source: by UZABASE based on various materials
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
17
Chinese Iron and Steel Industry – Finding the Way Out: Minor Boost of Domestic Demand and Exports
Export Excess Output: Total Capacity 1.05 Billion Tonnes, Domestic Demand 0.52 Billion Tonnes
As shown in the graph below, the overall domestic demand for crude steel was
roughly 520 million tonnes (tentative calculation) in 2015. According to the
National Bureau of Statistics, the total nationwide output capacity was
estimated to reach around 1.05 billion tonnes in 2015. The actual effective
output was 840 million tonnes based on an assumed operation rate of 80%.
Based on simple calculation (excluding inventory), roughly 39% of output was
surplus, requiring disposal through exports and other means. Steel material
exports increased by 50.7% YoY to reach 93.926 million tonnes in FY2014. As
per CEInet data, the accumulated export volume of steel materials hit 112
million as of end-December FY2015.
Source: UZABASE
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
18
Driving Factors of Domestic Demand for Steel (2015)
Major Industries
Status-quo Demand Forecast (10,000
tonnes) Calculation
(10,000 tonnes)
Real Estate
Investment in real estate industry: CNY 1.06 billion (2015)
Total area sold: 1.24–1.27 billion
sq. metres (2015)
New areas of construction: 1.78–1.82 billion sq. metres
(2015)
New demand: 8,900–11,830 (take 10,500)
Indemnificatory residences:
2,200
Renovation of rural residences:
1,830
Total: 14,530
New demand: 8,900–11,830 (1.78–1.82 billion sq. metres (new areas of
construction) x50–65 kg)
Indemnificatory residences: 2,200
(60 sq. metresx50 kg/sq. metresx7.40
million households)
Renovation of rural residences: 1,830
(100 sq. metresx50kg/sq. metresx3.66
million households)
Automobiles (60–70% of
vehicle)
Automobile manufacturing accounts for 6–7% of overall
steel demand in China, relatively low compared to OECD
countries (10%)
For manufacturing: 4,130
For repair: 2,400
Total: 6,530
(as per the Ministry of Public Security of the PRC)
For manufacturing: 4,130 (refer to Table A below)
For repair: 2,400
0.155 (0.15–0.16, incl. parts) x 154 million
vehicles (ownership as of 2014)
Railway
Investment in railway construction: CNY 800 billion
(2015) Total distance constructed in
2015: 8,000 km (CISA forecast: CNY 650 billion)
2,200 33,300 tonnes of steel materials consumed in CNY 100 million worth of investment
CNY 650 million x 33,300 tonnes/CNY
million
Private Airports 25 airports under construction in 2015, equivalent to CNY 300
billion in value
300 Around 10,000 tonnes of steel materials consumed in CNY 1 billion worth of
investment
Public Transport Facilities
(rails, stations, and relevant
facilities)
Total distance of rail constructed in 2015: 1,000 km
3,200 Relevant facilities: 3,200 Around 10,000 tonnes of steel materials
consumed in 1 km of rail (incl. stations and relevant facilities) that is worth CNY 100
million in value
Road Construction
50,000 km of road constructed in 2015
(motorway: 23,300 km)
1,600 Motorway: 1,000
(23,300 km x 450 kg/km)
General road: 600
(26,700 km x 450 kg/km)/2
(half the amount of steel materials used for motorway construction)
Machinery Manufacturing
(engineering equipment,
heavy machines for mining, agricultural industries)
140 million tonnes of steel materials consumed in
machinery manufacturing industry in 2014
14,000 Levelling off from the 2014 levels
Shipbuilding Completed: 36.29 million tonnes
(-16.3%)
1,400 Levelling off from the 2014 levels
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
19
New orders placed: 51.02 million tonnes (-25.9%)
Orders in-hand:
14.97 million tonnes (+15.1%)
Household Appliances
Washing machines: 72.00 million units
Air conditioners: 160 million
units
Refrigerators: 120 million units
8,310 Washing machines: 1,512
(72.00 million units x 0.21 kg/unit)
Air conditioners: 4,800
(160.00 million units x 0.30 kg/unit)
Refrigerators: 4,080
(120.00 million units x0.34 kg/unit) / 0.80
Total 520.70 million tonnes
Source: by UZABASE based on various materials
Table A: Estimated Number of Automobiles Sold by Vehicle Type and Steel Consumption (2015)
Vehicle Type
Passenger Vehicles Commercial
Vehicles
Light Automobile
SUV MPV Station Wagon
Trucks Bus
Number of Vehicles Sold (10,000 units; estimate)
1,251 510 258 106 323 65
YoY Growth (%) 1 25 35 -20 1.3 6.5
Steel Consumption (tonne/unit) 1.16 1.55 1.55 0.88 3.42 4.49
Steel Consumption (10,000 tonnes/vehicle type)
1,451.16 790.5 399.9 93.28 1,104.7 291.85
Total Consumption (10,000 tonnes) 4,131.40
Source: by UZABASE based on various materials
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
20
Chinese Iron and Steel Industry – Elimination of Overcapacity by 2020
Gap Between Excess Output Capacity and Demand for Crude Steel to be Filled by 2020
According to OECD data, the excess output capacity (output capacity - apparent
consumption) of crude steel was estimated to be 336–425 million tonnes in
China as of 2014, accounting for roughly 50–60% of total global overcapacity.
Furthermore, because the expansion in supply has outpaced domestic demand,
the balance between supply and demand will continue to deteriorate in China.
In response to such trends, the Chinese government has pledged to reduce
steel production by 100–150 million tonnes over a five-year period starting
from 2015. As shown in the graph below, it is believed that the overcapacity
issue will not be solved until 2020.
(The calculation is based on opinions from industry specialists which state that
by 2020, output capacity will be decreasing at the speed of 100 million tonnes
per annum; apparent consumption will increase to 1.0 billion tonnes; and the
facility operation rate will remain at the current industry average of 80%.)
Source: by UZABASE based on various materials
-10,000
0
10,000
20,000
30,000
40,000
50,000
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
China: Gap Between Supply and Demand (million tonnes)
Output Capacity of Crude Steel Apparent Consumption Gap
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
21
64.0%
66.0%
68.0%
70.0%
72.0%
74.0%
76.0%
78.0%
80.0%
82.0%
84.0%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000China: Crude Steel Manufacturing Industry (million tonnes)
Production Volume Output Capacity Apparent Consumption Operation Rate
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
22
Chinese Iron and Steel Industry – Involvement in Global Merger Trends
Large-Scale Mergers Expected to Take Place from 2015 Onward
Looking back on the past four rounds of global mergers in the iron and steel
industry, it is a common phenomenon that mergers and reorganisation take
place when the industry is exposed to severe circumstances, with the
subsequently occurring mergers and reorganisation activities in turn leading to
recovery in the industry.
At present, the Chinese iron and steel industry is struggling with a number of
factors, most notably overcapacity issues. Moreover, the industry has a low
concentration compared to OECD countries, and players operate with negligible
profits. Such an environment is believed to be conducive for mergers and
reorganisation activity in the industry.
Mergers in Iron and Steel Industry
Source: Uzabase
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
23
Chinese Iron and Steel Industry – Speculations of Local Governments and Enterprises
Various Speculations Among Enterprises and Local Governments
A number of companies in the iron and steel industry have been looking toward
mergers and reorganisation as a way to break out of the adverse industry
circumstances. However, it appears difficult not only for SMEs but also for
major players in the industry to realise such merger plans.
As of end-2014, there are six mega manufacturers in the Chinese iron and steel
manufacturing industry, each of which boasts an annual output exceeding 30
million tonnes. These are Hebei Iron & Steel (CHN), Baosteel (CHN), Jiangsu
Shagang (CHN), Anshan Iron & Steel (CHN), Wuhan Iron & Steel (CHN), and
Shougang (CHN). In comparison, there are 21 manufacturers that each have an
annual output of 10–20 million tonnes. Altogether, their output (approx. 0.82
billion tonnes) accounted for 72% of the national total (1.14 billion tonnes).
One of Beijing’s principle guidelines for the iron and steel industry is in spurring
the consolidation and reorganisation of manufacturers. However, such plans
have encountered numerous setbacks because local governments—a unique
political feature of China—are reluctant to carry through, owing to financial
concerns. The early-stage failure of the merger between Baosteel and Wuhan
Iron & Steel was another factor discouraging the progress of industry
consolidation and reorganisation.
In addition, policies stipulated by the central government often do not
penetrate to regional levels. This is because regional governments generally
offer local entities separate favourable policies (for example, in regards to
corporate taxation) based on their “locality”, and many aspects of the process
lack transparency.
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
24
Chinese Iron and Steel Industry - Industry Players
Merger Plans Carried Out Behind the Scenes; However, Successful Deals Remain to be Seen
The basic form of mergers and acquisitions is that a major manufacturer either
forms another industry major or pulls SMEs under its umbrella. However,
because major manufacturers are state-run companies, M&As require approval
from provincial authorities, which increases the likelihood that the deal will be
called to a halt. This issue requires further attention going forward. Find below
an overview of current merger deals—including buyers and sellers—based on
publicly disclosed information.
In particular, the movements of steel manufacturers in Northern China (i.e.
Hebei Iron & Steel, Shougang) and Eastern China (i.e. Baosteel, Jiangsu Shagang,
Wuhan Iron & Steel, Ningbo Iron & Steel) have been attracting attention. Note
that the merger between Baosteel and Wuhan Iron & Steel has been in an
impasse. If the deal works out, however, it will create a mega manufacturer
with an annual output capacity of over 100 million tonnes, and will likely
expedite the progress of other mergers in the industry as well.
Aberrant Operation Rate Indicating Chinese Major Manufacturers’ Intentions: No Output Reduction Despite Gloomy Sales
As shown in the graph below, each major manufacturer exhibits an abnormally
high operation rate of more than 80%. However, in spite of the frustrating
market, each company has been playing chicken in a struggle to survive, with
the intention of maintaining high production rates until their competitors
collapse. This is another factor contributing to the extraordinary operation rate.
According to a survey conducted by mysteel.com, a website specialising in iron
and steel, the average debt ratio of the 67 steel manufacturers surveyed in
2014 reached a dangerous level of 68.35%, and multiple companies have
exceeded 100% in terms of debt ratio.
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
25
Chinese Iron and Steel Industry – Industry Players
Leading Chinese Iron and Steel Manufacturers (2014)
Company Corporate
Type
Annual Crude Steel
Output Capacity (10,000 tonnes)
Annual Crude Steel
Output (10,000 tonnes)
Operation Rate (%)
Debt Ratio (%)
Specialised Industries
& Products
Primary Sales
Regions
Possible Merger & Deal Targets
Major Trade
Partners (JPN)
Hebei Iron & Steel
State-run 5000 4709 94.18 73.42 Railway vehicles and automobiles Spring steel
Northern China
※Small enterprise
s Shougang
Mitsui O.S.K. Lines
Baosteel State-run 5500※
Estimate 4335 78.8% 45.7%
Automobiles and automotive parts Cold- and hot-rolled steel sheets Aluminium steel
Nationwide
Wuhan Iron & Steel,
Ningbo Iron & Steel,
Jiangsu Shagang
Mitsui & Co.
Jiangsu Shagang
State-run 3920 3533 90.1% 41.0% Construction Carbon fibre bar steel
Eastern China
Huaigang Special Steel
Sojitz
Anshan Iron & Steel
State-run 4500 3435 76.3% 47.2%
Automobiles and automotive parts Cold- and hot-rolled steel sheets
Northeast China
Benxi Steel NYK Line
Wuhan Iron & Steel
State-run 3350 3305 98.7% 61.9%
Automobiles and automotive parts Cold- and hot-rolling steel sheets
Central China
Baosteel
Nippon Steel &
Sumitomo Metal
Shougang State-run 4000※
Estimate 3078 77.0% 61.1%
Automobiles and automotive parts Cold- and hot-rolled steel sheets
Northern China
Hebei Iron & Steel
Toyota Motor
Shandong Iron & Steel
State-run 3000 2334 77.8% 67.2%
Automobiles, petroleum, railway, construction, shipbuilding, household appliances Cold- and hot-rolled steel sheets, oil well pipes
Eastern China
Rizhao Steel
Ma'anshan Iron & Steel
(Magang)
State-run 2050 1890 92.2% 62.2% Construction materials Wire rods, rebars
Eastern China
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
26
Bohai Steel
State-run 2400 1849 77.0% N/A Construction, oil well pipes
Northern China
Hanwa
Benxi Steel State-run 2400 1626 67.8% 67.7%
Military relevant, marine, railway transport Special steel, rails
Northeast China
Anshan Iron & Steel,
Panzhihua Iron & Steel
Mitsubishi Heavy
Industries
Fangda Special Steel
State-run 1500 1364 90.9% 65.5%
Construction materials/rebars Automobiles/spring steel, Cold- and hot-rolled steel sheets
Eastern China
Xinyu Iron & Steel
Baogang State-run 1500※Esti
mate 1072 71.5% 80.5%
Railway rails, rare earth base alloy
Northern China
Mitsubis
hi Hitachi
Valin Steel State-run 2200 1538 69.9% 79.9%
Shipbuilding, automobile, large machinery Steel sheets, special steel, oil well pipes
Central and
Southern China
Shaogang Songshan,
Wuhan Iron & Steel
Mitsubishi Fuso Truck
and Bus, Isuzu
Motors
Anyang Iron & Steel
State-run 1000 1089 108.9% 76.3%
National defence, airplanes, traffic, shipbuilding related, oil well pipes, construction
Central and
Southern China
Wuyang Mining
Hebei Jingye Group
Private 1200 1054 87.8% 87.8%
Shipbuilding, road construction, construction
Northern China
Hohhot Steel
Jianlong Group
Private 1735 1526 88.0% N/A Automobiles and machinery manufacturing
Northern China
Haixin Iron & Steel
Mitsui & Co.
Rizhao Steel
Private 1350 1140 84.4% 88.3%
Construction for civil and industrial use, railway bridges, public facilities, nuclear facilities Wire rods, special steel
Eastern China
Shandong Iron & Steel
Jiuquan Iron & Steel
State-run 1000 1034 103.4% N/A
Automobiles, shipbuilding, construction Steel sheets, special steel
Northwest China
Mitsubishi
Hitachi Power
Systems
Taiyuan Iron & Steel
State-run 1500 1072 71.5% 68.9%
Automobiles, military relevant Special stainless steel
Northern China
Xishan Coal
Electricity
Nippon Yakin Kogyo
Total 49105 40983 83.5% 66.1%
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
27
Chinese Iron and Steel Industry – Each Company Accelerating Entries into Overseas Markets Despite Anti-dumping Measures
Each Country Slapping Anti-dumping Duties on China to Protect Domestic Industries; Chinese Players Establishing Factories Overseas
Faced with low-priced Chinese exports, many countries have levied anti-
dumping taxes in an attempt to protect their own domestic enterprises. To
tackle the situation, Chinese industry majors have turned to establishing on-site
factories in overseas locations.
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
28
Anti-dumping Probes and Duties Against Chinese Steel Exports
Region Country Target Products Investigation Start
Date Implementation
Date Tax Rate
Southeast Asia
Malaysia
Stranded wires 5 January 2014 12.39%, 5 years
Reinforced Concrete (RC) 1 September 2014 N/A
Hot-rolled coils 17 October 2014 1 February 2015 14.87–29.37%, 120
days
Hot-rolled steel sheets 14 December 2014 23.93%, 200 days
Reinforced Concrete (RC) 1 January 2015 N/A
Hot-rolled coils, checkered plates, pickled
coils 1 February 2015 N/A
Cold-rolled stainless steel sheets
1 April 2015 N/A
Mid- to thick steel plates 1 July 2015 3 years
Coloured steel plates 1 September 2015 N/A
Pre-coated/coloured coils 1 April 2015 4 January 2016 52.10%, 5 years
Cold-rolled steel sheets 1 August 2015 3 January 2016 4.58–23.78%, 120
days
Thailand
High carbon wire rods 17 May 2014 5.17–33.98%,
5 years
Hot-rolled non-alloy steel flat products
30 January 2014 1 January 2015 N/A
Low carbon wire rods 1 January 2015 1 September 2015 N/A
Clad materials 1 February 2015 N/A
Hot-rolled coils 1 May 2015 3.45–128%, 5 years
Stainless pipes 1 September 2015 Not disclosed
Indonesia
Ferrous and non-alloy steel sheet
26 May 2014 3 years
Shaped steel (H, I) 10 October 2014 3 years
Irregularly wound hot-rolled bars and rods
1 January 2015 N/A
Cold-rolled stainless steel 22 December 2014 N/A
Shaped steel (H, I) 1 February 2015 3 years
Iron and steel 1 June 2015 20%
Wire rods 1 August 2015 3 years
Vietnam
Cold-rolled stainless steel (coils and/or sheets)
7 October 2014 4.64–6.87%
Alloy billets 1 October 2015 10%
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
29
Region Country Target Products Investigation Start
Date Implementation
Date Tax Rate
Asia
South Korea
H-shaped steel 29 December 2014 1 May 2015 28.23–32.72%, 5
years
Taiwan Cold-rolled stainless steel 15 August 2013 5 March 2014 38.11%, 5 years
India
Cold-rolled stainless steel sheet (400 series)
19 September 2014 N/A
Ferrous, alloy, and non-alloy (non-iron casting and
stainless) seamless steel pipes and hollow
structural sections
11 March 2014
2.5 years (1st year 25%, 2nd year 15%, 3rd year (6-month)
5%)
Hot-rolled stainless steel sheets (304 series)
11 March 2014 1 June 2015 5 years
Cold-rolled Cr stainless plate steel (400 series)
1 March 2015 N/A
Seamless steel pipes and hollow structural sections
1 July 2015 N/A
Iron and steel 1 September 2015 20%
Hot-rolled coil 1 September 2015 20%
Hot-rolled plate steel, mid to thick plate
1 December 2015 Not disclosed
Cold-rolled stainless plate steel
1 December 2015 5 years
Pakistan
Billets 1 August 2015 N/A
Cold-rolled plate steel 1 August 2015 N/A
Zinc-galvanised plate steel 1 August 2015 N/A
Wires 1 October 2015 N/A
Iran Steel materials 1 February 2015 10–20%
Region Country Target Products Investigation Start
Date Implementation
Date Tax Rate
Oceania
Australia
Hot-rolled plate steel 1 March 2015 1 August 2015 N/A
Steel bars 1 March 2015 1 December 2015 N/A
Welding tubes 1 March 2015 1 April 2015 N/A
Zinc-galvanised steel and alloy-coated steel sheets
1 June 2015 N/A
Deep drawn stainless steel sinks
1 December 2015 N/A
Deformed bar steel 1 December 2015 N/A
Rod in coil 8 February 2016 N/A
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
30
Region Country Target Products Investigation
Start Date Implementation
Date Tax Rate
Africa
Egypt Deformed bar steel 14 October 2014 1 May 2015 CIF7.3%
(tax rate < EGP 290/tonne), 3 years
Morocco Cold-rolled steel
sheets and clad plates 11 June 2014 N/A
Guatemala Zinc-galvanised steel
sheets
1 January 2015 N/A
24 March 2014 N/A
Peru Hot-rolled steel pipes 1 May 2015 N/A
Zambia Iron and steel 1 July 2015 N/A
South Africa Iron and steel 1 September 2015 10%
Algeria Deformed bar steel,
wire rods, steel pipes, billets
1 October 2015 30%
Region Country Target Products Investigation
Start Date Implementation
Date Tax Rate
South America
Brazil
Electric steel 5 July 2014 USD 132.5–567.16/tonne
Seamless steel pipes 31 October 2014 USD 908.59/tonne, 5 years
Thick clad plate steel and boron steel
plates (mid to thick)
19 December 2014 N/A
Coated flat steel 1 January 2015 N/A
Boron steel plates (thick)
1 September 2015 N/A
Seamless carbon fibre steel pipes
1 September 2015 N/A
Seamless steel pipes 1 December 2015 N/A
Stainless sinks 1 May 2015 N/A
Hot-rolled steel sheets
1 June 2015 72.16–78.96%
Cold-rolled steel sheets
24 April 2014 N/A
Columbia
Hot-rolled wire rods 1 January 2015 N/A
Hot-rolled galvanised steel sheet
6 March 2014 USD 824.57/tonne; when
this price exceeds FOB price, take the price difference.
Wire rods 28 March 2014 N/A
Hot-rolled wire rods 1 July 2015 N/A
Hot-rolled alloy wire rods, bar steel
1 October 2015 N/A
5 January 2016 Period extension
Argentina Duct affiliates 1 October 2015 N/A
1 November 2015 N/A
Dominica Hot-rolled bar steel 1 January 2015 6 months
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
31
Source: by UZABASE based on various materials
Region Country Target Products Investigation
Start Date Implementation
Date Tax Rate
North America
USA
Electric Steel 25 September 2014 159.21%
Non-oriented electromagnectic steel sheets
6 November 2014 407.52%
Carbon wire rods 15 December 2014 106.19–110.25%
Non-casting duct affiliates 1 January 2015 75.50%
Oil well pipes 1 April 2015 N/A
Steel piles 1 April 2015 N/A
Nail-free steel shelves 1 March 2015 N/A
Deep drawn stainless steel sinks
1 May 2015 N/A
Steel strands for prestressed concrete structures
(prestressed concrete steel) 1 July 2015 N/A
Zinc-galvanised plate steel 1 June 2015 N/A
Nail-free steel shelves 1 August 2015 N/A
Cold-rolled steel sheets 1 August 2015 1 September 2015 N/A
Steel piles 1 September 2015 N/A
Iron bars 1 October 2015 N/A
Wire hangers 1 November 2015 N/A
Rebars 1 November 2015 N/A
Erosion-resistant steel 1 December 2015 255.80%
Carbon steel wires and bars 1 November 2015 N/A
Seamless oil well pipes, etc. 1 December 2015 N/A
Reinforced concrete (RC) 8 February 2016 N/A
Mexico
Seamless pipes 8 January 2014 USD 1569.92/tonne,
additional charge
Carbon steel welded joint 1 July 2015 5 year extension
Wire rods 1 September
2015 N/A
Wire rods 1 August 2015 N/A
Iron and steel 1 September 2015 Adjustment on import
tax
Concrete nails 1 November 2015 N/A
Hot-rolled steel sheets 1 December 2015 N/A
Cold-rolled steel sheets 1 December
2015 N/A
Wire rods 1 December 2015 N/A
Zinc-alloy door knobs 1 December 2015 N/A
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
32
Region Country Target Products Investigation
Start Date Implementation
Date Tax Rate
Europe
EU
Oil well pipes 31 March 2014 N/A
Electric steel 14 August 2014 1 October 2015 N/A
Deformed bar steel 1 April 2015 N/A
Fatigue-resistant concrete bar steel 1 April 2015 5 January 2016 9.2–13.0%, 6 months
Silicon steel 1 May 2015 28.70%
Cold-rolled steel sheets 1 May 2015 8 February 2016 6 months
Steel strands for pre-stressed concrete structures (pre-stressed concrete steel)
1 June 2015 N/A
Stainless flat steel 1 August 2015 N/A
Steel pipe parts 1 October 2015 1 October 2015 N/A
Castable rebars and joints 1 November 2015 N/A
Wire rods 1 November 2015 N/A
Thick steel plate of non-alloy and other alloy
1 February 2016 N/A
Seamless pipes 1 February 2016 N/A
EEC Stainless cutlery 1 January 2015 15.56–74%
Cold-rolled stainless steel sheets 1 March 2015 10.9–25.2%
Ukraine
Seamless pipes and high-pressure pump pipes
1 March 2015 N/A
Seamless stainless pipes 29 November 2014 41.07%, 5 years
Turkey Hot-rolled coils 1 January 2015 N/A
Cold-rolled stainless steel 1 August 2015 N/A
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
33
Overseas Entries of Leading Chinese Manufacturers
Region Company Country Entered
Year of Entry
Investment Size Output
Capacity
Asia
Rizhao Steel Myanmar, the
Philippines 2015 Established an office N/A
Anshan Iron & Steel Indonesia 2015 CNY 800 million 5 million tonnes
Nanjing Iron & Steel Indonesia 2014 CNY 1.3 billion 1 million tonnes
Anshan Iron & Steel Japan, South
Korea 2009
Signed a long-term agreement on marine transport of iron ores with STX
(KOR) and Mitsui O.S.K. Lines (JPN) N/A
Europe
Bohai Steel British Virgin
Islands 2015
Operating international trade and commercial consulting services of bulk
commodities like iron ores N/A
Ma'anshan Iron & Steel
France 2014 Acquired SAS Valdunes (FRA) for EUR 13
million N/A
Hebei Iron & Steel Switzerland 2014 Increased its stock share in Duferco
DITH (CHE) to 51% N/A
Shandong Iron & Steel
Tangier, Morocco
2014 USD 150 million 0.25 million
tonnes
Africa
Xinxing Ductile Iron Pipes
Ethiopia 2015 Procured 100,000 tonnes of ductile cast
iron pipes 3 million tonnes
Hebei Iron & Steel South Africa 2014
Owned 270 million tonnes of high-quality iron resource, 200 million
tonnes of copper resource, and world third largest vermiculite ore reserve
5 million tonnes
Shandong Iron & Steel
Sierra Leone 2012 USD 1.5 billion 6.77 million
tonnes
Wuhan Iron & Steel Liberia 2010 USD 68.46 million 10 million
tonnes
South America
Wuhan Iron & Steel Brazil 2010 Jointly established a factory with Prumo Logistica (BRA; formerly known as LLX
Logistica) by investing USD 5 billion N/A
Wuhan Iron & Steel Brazil 2009 Acquired MMX from EBX Group (BRA)
for USD 400 million N/A
Oceania
Shandong Iron & Steel
Australia 2015 CNY 18.0 billion N/A
Anshan Iron & Steel Australia 2013 Increased its stock share in Karara Iron
Ore Mine (AUS) to 52.16% N/A
Baosteel Australia 2012 Iron ore reserve reached 5.2 billion
tonnes 1.50 million
tonnes
Pangang Group Vanadium Titanium
& Resources Australia 2011
Iron ore reserve reached 3.67 billion tonnes
10 million tonnes
Anshan Iron & Steel Australia 2009 Increased its stock share in Gindalbie
Metals (AUS) to 36.28%, becoming the largest shareholder of this company
N/A
North America
Tianjin Seamless Steel Tube & Pipe
USA 2014 USD 1.0 billion N/A
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
34
North America
Hebei Iron & Steel Canada 2012 CNY 1.2 billion 4.80 million
tonnes
Anshan Iron & Steel USA 2010 Four rebar manufacturing plants and
one electric steel factory N/A
Source: by UZABASE based on various materials
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
35
Chinese Iron and Steel Industry – Steel Material Prices Dropping, Likely to Plunge Even Faster
Steel Material Prices on Continuous Downtrend; Market Deteriorating Since Early 2015
Compared to end-2012, the prices of major steel materials dived to lower than
half of those of October 2015. Given that concrete policies to back the Chinese
construction industry have yet to be finalised, these prices are highly expected
to plunge further.
1,000.00
1,200.00
1,400.00
1,600.00
1,800.00
2,000.00
2,200.00
2,400.00
2,600.00
2,800.00
3,000.00
Iron Scrap (Raw Material)
Beijing Dalian Guangzhou Shanghai Xi’an
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
Crude Steel/Raw Iron (L8–10)
Kunming Guiyang Longyan Anyang Yicheng Tangshan
Wu’an Linyi Zibo Ma’anshan Harbin
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
36
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
Billet (Q235)
Jiangsu Shandong Tangshan Shanxi
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
Steel Rebar (HRB400 20mm, Nationwide)
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
Wire Rod (High Tensile 6.5)
Chongqing Wuhan Shenyang Shanghai Guangzhou Tianjin Beijing
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
37
Source: by UZABASE based on various materials
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
Hot-rolled Steel Sheet (4.75mm Coil)
#REF! Wuhan Shenyang Shanghai Guangzhou Tianjin Beijing
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
5,000.00
5,500.00
Cold-Rolled Steel Sheet (1.0mm Coil)
Wuhan Chongqing Shenyang Shanghai Guangzhou Tianjin Beijing
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
Mid to Thick Plate Steel (20mm)
Chongqing Wuhan Shenyang Shanghai
Guangzhou Tianjin Beijing
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
38
Chinese Iron and Steel Industry – A Harsh Winter for the Industry: From the Perspective of Revenue Model
Narrow Margin with High Turnover No Longer Attainable for Chinese Steel Manufacturers
As demonstrated in the graph “Profit Model Calculation (Tentative)” below, the
iron and steel manufacturing industry is already trapped in a negative business
cycle, in which manufacturers cannot gain profits even if they manage to sell
their products. A variety of products ranging from pig iron and billets to wire
rods and plate steel have seen manufacturing costs exceed selling price. In
particular, steel rebar, which is mostly used in the real estate construction
industry, is in extreme trouble with a unit price of CNY 350–400 per tonne.
Moreover, given the forthcoming bubble burst in the real estate industry, as
well as the increase in the number of vacant properties in Tier 2 and 3 cities,
where real estate sales have been unfavourable, it can be said that a recovery in
price is unlikely due to extremely low demand.
Source: by UZABASE based on various materials
-500
-400
-300
-200
-100
0
100
200
300
May/1
4
Jun
/14
Jul/1
4
Au
g/14
Sep/1
4
Oct/1
4
No
v/14
Dec/1
4
Jan/1
5
Feb/1
5
Mar/1
5
Ap
r/15
May/1
5
Jun
/15
Jul/1
5
Au
g/15
Sep/1
5
Oct/1
5
No
v/15
Raw Iron Billet
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
39
Source: by UZABASE based on various materials
Source: by UZABASE based on various materials
Basic Profit Model
Raw iron cost =[Iron ore price on a dehydrated base / Water (0.92) ∗ Iron ore blended (1.6) + Coke price ∗ Coke blended (0.5)]
Process cost
Crude steel cost = [Raw iron cost ∗ Raw iron blended (0.96) + Iron scrap ∗ Iron scrap blended (0.15)]
Crude steel process cost (0.82)
-500
-400
-300
-200
-100
0
100
200
May/1
4
Jun
/14
Jul/1
4
Au
g/14
Sep/1
4
Oct/1
4
No
v/14
Dec/1
4
Jan/1
5
Feb/1
5
Mar/1
5
Ap
r/15
May/1
5
Jun
/15
Jul/1
5
Au
g/15
Sep/1
5
Oct/1
5
No
v/15
Rebar High speed wire rods
-1000
-800
-600
-400
-200
0
200
400
May/1
4
Jun
/14
Jul/1
4
Au
g/14
Sep/1
4
Oct/1
4
No
v/14
Dec/1
4
Jan/1
5
Feb/1
5
Mar/1
5
Ap
r/15
May/1
5
Jun
/15
Jul/1
5
Au
g/15
Sep/1
5
Oct/1
5
No
v/15
Hot-rolled steel Cold-rolled steel Mid to thick plate steel
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
40
Chinese Iron and Steel Industry – Eastern China: Product Unit Price Relatively High, Expected to Recover Soon
Market in Eastern China Expected to Recover Sooner than Northern China
In regard to regional price difference, steel products—for example rebar and
hot-rolled steel sheets—in Northern China (Beijing), where the overcapacity
situation is more severe, have a lower unit price compared to Eastern China
(Shanghai). The overall recovery for the Northern Chinese market is also slow.
Source: by UZABASE based on various materials
Note: Price difference = Price (Shanghai) - Price (Beijing)
-200
-100
0
100
200
300
400
500
Jul-1
3
Au
g-13
Sep-1
3
Oct-1
3
No
v-13
Dec-1
3
Jan-1
4
Feb-1
4
Mar-1
4
Ap
r-14
May-1
4
Jun
-14
Jul-1
4
Au
g-14
Sep-1
4
Oct-1
4
No
v-14
Dec-1
4
Jan-1
5
Feb-1
5
Mar-1
5
Ap
r-15
May-1
5
Jun
-15
Jul-1
5
Au
g-15
Sep-1
5
Oct-1
5
No
v-15
Price difference of rebar Price difference of hot-rolled steel sheets
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
41
Chinese Iron and Steel Industry – Steel Material Exports Increasing, While Imports Sluggish
High-End Market Demand Highly Dependent on Imports, However Some Enterprises Are Introducing High-End Production Facilities
Currently, some high-end markets in China (e.g. shape memory alloy and
automotive security components) are forced to rely on imports for steel
material.
As a result, some industry majors have been introducing production facilities for
such materials from overseas through large-scale investment. It is forecast that
from 2013 onward, exports will continue to expand, while imports will level off
until a stable domestic supply of such materials is achieved.
Source: CEInet
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
USD
10
,00
0
Imports and Exports of Steel Materials
Imports Exports
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
42
Looking Ahead: Future Trends
Industry players will likely focus more on overseas consumption than domestic
demand, and favourable government policies should spur companies to
increase the scope of their exports through expansion into global markets.
Stricter local regulations and the subsequent increase in M&A activity will see
the emergence of mega manufacturer groups, each with an annual capacity of
more than 100 million tonnes. These mega manufacturers will have a focus on
Northern China, Eastern China, and Southern China, respectively.
There is also a need for structural reform, whereby China must reduce its
dependence on the construction industry, which currently generates almost
60% of demand for steel materials, and instead look toward development of
high-end steel materials used in industries such as automotive security
components, aerospace, and nuclear facilities, with the aim of achieving a
stable domestic supply of such materials. (Some observers may argue that what
China lacks is not the technology and facilities required for these materials, but
rather proper management processes).
Finally, the government must implement price controls for the steel materials
industry. The government should actively employ itself in the pricing system,
aiming to reform the current regional price forming mechanism and establish a
new one that ensures nationwide price stability.
Source: by UZABASE
Chinese Iron and Steel Industry:
Large-Scale Mergers to Ease Overcapacity
43
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