A worker loads steel products at Kailida Steel in Tangshan, Hebei province. [Photo / China Daily]

Hampered by lower demand, higher costs, steelmakers fear for the future

TANGSHAN, Hebei - For over a year, what Bai Guolin has mostly done at work is roam around his steel factory in the suburbs of Tangshan, fretting about how to sell the thousands of tons of steel piled around the factory.

As the sales director of Tangshan Taihe Iron and Steel Co Ltd, he reminisces about how the steelmaker used to work overtime catching up with orders three years ago, while now it struggles on the edge of bankruptcy.

"The competition in the market is so fierce that prices are kept extremely low, some times even lower than our cost," said Bai, whose company has an annual capacity of 1 million tons of structural steel.

"Prices have been declining ever since the financial crisis began and the export market collapsed. We have made hardly any money in more than a year."

Taihe is only one of the hundreds of small steel mills in Hebei province whose business is being endangered by low prices and weak demand. In Xiaotun village, home to more than 50 steel mills, seven structural steelmakers told China Daily much the same story as Bai's.

Liang Jianjun, sales director of channel steel producer Kailida Steel, said the price of channel steel has dropped nearly 15 percent to about 4,000 yuan ($604) a ton since 2008. "We're fortunate that we can now break even after making a few adjustments. Many of my friends have gone out of business already," he said.

"We work only three days a week at half capacity. It's hard to sell, since it seems that market demand is low," said Song Baili, sales manager at Tangshan Xinhai Iron & Steel Co Ltd, another channel steel maker who produces 800,000 tons a year.

Analysts say the woes of numerous small and medium-sized steelmakers are the result of overcapacity in low-end steel products in China's fragmented steel industry.

With the launch of small private steel mills, the country's steel industry had been expanding mostly in quantity over the years, but not quality, resulting in products that are unable to compete in the market since they are not technologically advanced.

Hebei Iron and Steel General Manager Yao Hongbo said in a conference in November that China's top five steel companies control 29 percent of the country's total steel capacity, compared with the situation in the United States, where the top five firms control 67 percent, and in Japan, where the top firms control 71 percent.

"The collapse of the export market during the financial crisis helped expose the long-standing structural problems of overcapacity in China's steel industry" said Cui Jingyi, a senior steel analyst with Guotai Junan Securities.

China's raw-steel exports plummeted to 2.9 million tons in 2009, down 94 percent from 48 million tons in 2008, according to data from the General Administration of Customs. Meanwhile, the country's steel output reached a new record of 568 million tons in 2009, up 13.5 percent year-on-year, according to a report last year released by the China Iron & Steel Association.

"Fragmentation in the industry gives rise to cutthroat price wars. Small and medium-sized steel mills are also less energy-efficient and cause greater pollution," Cui said.

In fact, government efforts to consolidate the fragmented steel industry have been ongoing for years, but with limited results. Local governments, which receive tax revenue from steelmakers, have had difficulty in reaching agreements with each other.

However, the efforts have gained greater urgency since last year with the revamping of the industry, including culling low-quality production and upgrading technology, as the government sharpens its focus on building a more sustainable, environmentally friendly growth model for the economy.

In August, the government said the fragmented steel industry has led to overcapacity and depressed metal prices, and reduced the ability of Baosteel Group Corp and others to obtain cheaper materials.

It urged the domestic industry to consolidate both within and across China's regions, aiming to let its top 10 steelmakers control 60 percent of national steel capacity by 2015, up from 44 percent in 2009.

Chen Yanhai, director of the raw-material department of the Ministry of Industry and Information Technology, has said that China will reduce the number of steelmakers from 800 to 200, through consolidation and closing outdated producers.

In July, the Ministry of Finance also cancelled a 9 percent export tax rebate for hot-rolled coil and a 13 percent rebate for cold-rolled coil.

"Small and medium-sized steel mills will suffer from the financial strain and create more consolidation opportunities for larger steel mills," Yu Liangui, a senior analyst from the website and consulting firm Mysteel.com, told China Daily last year.

At the forefront of China's steel industry consolidation is Hebei Iron & Steel Group, the country's biggest steel producer by output.

The group has engaged in a series of mergers and acquisitions since it was formed in June 2008 in the merger between Tangshan Iron & Steel Group and Handan Iron & Steel Group.

Hebei Steel signed agreements on Dec 31 to initially take a 10 percent stake in each of seven private steel mills in Hebei province, cooperating on raw-material procurement, planning, marketing and management.

The deals follow Hebei Steel's purchase of 10 percent stakes in five other private mills on Nov 11. In 2009, three State-owned steel firms in Hebei province were merged into Hebei Steel.

In fact, Hebei province, which produced 135 million tons of steel in 2009, 24 percent of the national total, aims to create three to five strong and competitive steel enterprises by the end of the 12th Five-Year Plan (2011-2015) and would deny credit or cut electricity supplies to firms that refuse to participate in the restructuring efforts.

And Wang Yifang, President of Hebei Iron and Steel Group, told the People's Daily in August that the group's consolidation steps won't slow down in 2011.

"In 2011, apart from increasing integration within the group, we will accelerate our search for new formulas to consolidate with private enterprises and set an example for the whole steel industry in Hebei province to help improve its overall competitiveness," he said.

Industry consolidation will also help the nation gain more bargaining power over the cost of importing iron ore, industry experts say.

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China's steelmakers paid 175 billion yuan to buy iron ore from the world's top three mining operations from January to November in 2010, more than double the iron mining industry's 77 billion profit for the whole of 2010, according to a report in January from Economic Information Daily, which cited information from an internal industry meeting.

The report quoted an anonymous official of the China Iron and Steel Association as saying that the rising cost of iron ore is increasingly eroding Chinese steelmakers' profits and that China's steel industry is about to enter an "era of high cost, high price and low profit" in 2011.

"Consolidation will help reduce the number of iron ore importers and demand for the metal in China. With fewer faces at the negotiating table with exporters, China will have more bargaining power in setting a price," said Su Weikuan, head of the Tangshan office of Beijing Ye-Steel Trading Co Ltd.

But Su also cautioned that a government-initiated, instead of a market-initiated, consolidation could give rise to problems.

"In some cases, government-controlled companies with poor performance have taken over profit-making private companies. And some private companies' business has begun to decrease after importing the management structure and personnel from the State-controlled companies," he said.

"Sometimes it seems that some mergers are made due to government policies."

Su suggests that consolidation should maintain the distinction between government-controlled and private companies. "Government-controlled companies and private companies have big differences in their business models, management structures and corporate cultures. Separating them will help boost the efficiency of the consolidation," he said.

"Consolidation is a good thing only if it can boost productivity by saving costs and raising efficiency. If it's simply a response to the government policies, we would be better off not doing it."