65The Transformation of China’s Steel Industry

CharlieShaopreparedthisCaseunderthesupervisionofDr.XiaohongWuandProfessorMichaelJ.Enrightforclassdiscussion.ThisCaseisnotintendedtoshoweffectiveorineffectivehandlingofdecisionorbusinessprocesses.©2005byTheAsiaCaseResearchCentre,TheUniversityofHongKong.Nopartofthispublicationmaybereproducedortransmittedinanyformorbyanymeans-electronic,mechanical,photocopying,recording,orotherwise(includingtheInternet)-withoutthepermissionofTheUniversityofHongKong.Ref.05/252C1XIAOHONGWUMICHAELJ.ENRIGHTTHETRANSFORMATIONOFCHINA’SSTEELINDUSTRYChinaisthefastestgrowingandlargeststeel-producingandsteel-consumingcountryintheworld,accountingfor23%ofglobalproductionand27%ofconsumptionin2003.Injustadecade,thesefigureshadincreasednearlytwofold–theywere12.3%and17%respectivelyin1993.1ThemassiveexpansionofChina’ssteelindustryhasbeenakeyfactorintherevivaloftheworldsteelindustryinrecentyears.Asteel-makingsurgeinlate2003resultedinthemostwidespreadshortageofrawmaterialsinthehistoryofthesteelindustry.DespiteChina’sstatusastheworld’slargeststeel-producingcountry,itwasalsooneofthelargestnetsteelimportersintheworld.TheInternationalIronandSteelInstitute(IISI)statisticsshowedthatChinaimported22.6milliontonsofsteelin2002,makingittheworld’ssecondlargestnetimporter,aftertheUnitedStates(US).2AlthoughitturnedanetexporterofsteelinNovember2004,Chinaremainsanetimporterofhigh-valueaddedsteeltomakeupfortheshortfallsinsupply.NetimportsofsteelsheetproductsinChina,basedontheWorldSteelDynamics’hot-rolledbandequivalent(HRBEQ),wereestimatedat24milliontonsannuallyin2004.3China’saccessiontotheWorldTradeOrganization(WTO)producedprofoundstructuralimpactsonawiderangeofChineseindustries,includingthesteelindustry.High-endproductswouldbemostaffectedbecausetariffreductionsfavouredthatendofthemarket.Theimpactoftariffreductionwouldbecompoundedwhenotherbarriersonsteelimportswereremoved,thesteeltradinganddistributionsystemswereopenedup,andconditionsonforeigninvestmentsinChina’ssteelindustrywererelaxed.1WorldSteelinFigures2004Edition,InternationalIronandSteelInstitute.2WorldSteelinFigures2004Edition,InternationalIronandSteelInstitute.3Marcus,P.F.(2004)“Steel:China’sDrivingtheBus”,DeutcheBankAG.HKU416FortheexclusiveuseofS.ILThisdocumentisauthorizedforuseonlybyStudentILinInternationalMergersandAcquistionstaughtbyJosephACloughertyfromJanuary2014toMay2014.05/252CTheTransformationofChina’sSteelIndustry2ThereisanurgentneedforChinatomakethetimelytransformationfromavolumeproducertoaqualityproducerasthecountryupgradesitsindustriestointernationalstandardstofaceuptoWTO’schallengesandtomeetthedemandforhigh-qualitysteelproducts.IndustryDescriptionSteel,eitherintheformofsemi-finishedorfinishedproducts,isanimportantrawmaterialinindustriesthatbuildtheinfrastructureofamodernsociety.Typically,theironandsteelmakingprocesscanbedescribedinfivestages:cokemaking,ironmaking,steelmaking,casting,andformingandfinishing[seeExhibit1and2].Semi-finishedsteelproducts,dependingontheirsizeandcrosssection,canbeclassifiedasslabs,bloomsorbillets.Thesearesubsequentlyprocessedintofinishedsteelproducts.Finishedsteelproductscanbecategorisedintolongandflatproducts.Generallyspeaking,flatproductsareofhigherqualityandvaluethanlongproducts,astheyinvolvefurtherdownstreamre-rollingandprocessing[seeExhibit2].ConsumersSteelconsumersincludecapitalgoodsindustries(eg,construction,machinery,heavytransport,oilandgas)andconsumergoodsindustries(eg,automotive,homeappliance,packaging).Intermsofvolumeofsteelconsumed,theautomobileandconstructionindustriesleadthepackinmostcountries[seeExhibit2].IntheUSforinstance,theautomotiveandconstructionindustriesaccountedforawhopping14%and29.5%respectivelyofsteelshipmentsin2003,followedbyasignificantlylower5.5%formachinery,3%foroilandgas,1.6%fordirectappliancesand3.4%forcontainers.4KeySuccessFactorsThesuccessofsteelcompaniesisincreasinglydependentonthefollowingfactors:•AstrongR&D(researchanddevelopment)capabilityinproductimprovementanddevelopment,continuousimprovementinprocessautomationandoptimisation,aswellasthereductionofrawmaterialandenergyconsumptioninsteel-makingprocesses.•Accesstohigh-qualityrawmaterial,includingironore,coal,scrapsteel,etc.•Majorcapitalinvestmentstofinancecontinuousproductdevelopment,processimprovementandthereductionofrawmaterialandenergyconsumption.•Astrongcapabilitytoforgepartnershipswithkeycustomers,includingtheabilitytoworkwiththeautomobileindustryfromthevehicledesignstage,topromoteR&Dinvehiclestoreducemanufacturingcosts,andtopromotemanufacturingtechniquesthatarelesscapital-intensive,anddeliveringsuperiorproductpropertiesatthesametime.•Aknowledgeableworkforcethatnotonlyhasthetechnicalexpertise,butalsoanaptitudeforcross-functionalteamwork,internallyandexternally.•Forsmallsteelmills,theavailabilityandcostofhigh-qualityscrapandscrapsubstitutessuchasdirectlyreducediron(DRI)andironcarbide,andtoalesserextent,cheapelectricitysupply.Forthoseinthelow-endmarket(mainlylower-valueaddedlongproductssuchasreinforcingbarsandconstructionshapes,supplementedbylower-qualityflat-rolledproducts),