01 Chinese Iron and Steel Industry: Large-Scale Mergers to Ease Overcapacity Written by Yichen Mao [email protected]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.
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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
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
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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: 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
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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