Chinese Iron and Steel Industry: Large-Scale Mergers to Ease Overcapacity

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.

 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.

 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.

 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.

 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

 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’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
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

 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

 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 – 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).

Source: CISA

 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.

Source: CEInet

 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.


 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 – 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.

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) Newareas 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)x50–65kg) Indemnificatory residences:2,200 (60 sq. metresx50kg/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)x154 million vehicles (ownership as of 2014)
Railway Investment in railway construction: CNY 800 billion (2015) Total distance constructed in 2015: 8,000km (CISA forecast: CNY 650 billion) 2200 33,300 tonnes of steel materials consumed in CNY 100 million worth of investment CNY 650 millionx33,300 tonnes/CNY million
Private Airports 25 airports under construction in 2015,equivalent to CNY 300 billioninvalue 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: 1,000km 3200 Relevant facilities: 3,200 Around 10,000 tonnes of steel materials consumed in 1km of rail (incl. stations and relevant facilities) that is worth CNY 100 millioninvalue
Road Construction 50,000km of road constructed in 2015 (motorway: 23,300km) 1600 Motorway: 1,000 (23,300kmx450kg/km) General road: 600(26,700kmx450kg/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 14000 Levelling off from the 2014 levels
Shipbuilding Completed:36.29 million tonnes (-16.3%) New orders placed: 51.02 million tonnes (-25.9%) Orders in-hand: 14.97 million tonnes (+15.1%) 1400 Levelling off from the 2014 levels
Household Appliances Washing machines:72.00 million units Air conditioners: 160 million units Refrigerators: 120 million units 8310 Washing machines: 1,512 (72.00 million unitsx0.21kg/unit) Air conditioners:4,800 (160.00 million unitsx0.30kg/unit) Refrigerators:4,080 (120.00 million unitsx0.34kg/unit) / 0.80
Total 520.70 million tonnes
Source: by UZABASE based on various materials
Source: by UZABASE based on various materials

 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

 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.

 cMergers in Iron and Steel Industry

Source: Uzabase

 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 – 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, 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 – Industry Players
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 enterprises 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% 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% 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
Bohai Steel State-run 2400 1849 77% 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※Estimate 1072 71.5% 80.5% Railway rails, rare earth base alloy Northern China Mitsubishi 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% 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 – 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.

Anti-dumping Probes and Duties Against Chinese Steel Exports
Overseas Entries of Leading Chinese Manufacturers
Source: by UZABASE based on various materials

 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.


Source: by UZABASE based on various materials

 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

 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)

 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

 Chinese Iron and Steel Industry

 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