Steel companies diversify into non-core business
By Richard Fu |
March 15, 2012, Thursday
|
Print Edition
Print Edition
CHINESE steel companies are investing more in non-core business rather than furnaces this year to diversify in the face of a stalled market.
That included a hog-raising plan announced by Wuhan Iron & Steel (Group) Corp President Deng Qilin, which reveals just how far China's steel industry has sunk after getting squeezed by weaker demand and higher raw material costs.
Deng told the media earlier this month that pig farming will be part of the 39 billion yuan (US$6.2 billion) investment budget for non-steelmaking activities this year at the central China-based company.
He noted that a reinforced steel bar sells for around 4,700 yuan a ton, or 4.7 yuan a kilogram. The cheapest pork, by contrast, sells for 26 yuan a kilo.
Deng's remarks immediately grabbed media headlines, though a company spokesman later tried to damp the hype by noting that pigs would eat up only a small portion of the company's non-core business spending.
Pigs are actually no laughing matter. Hog farming has become a hot investment theme in China, the world's largest consumer of pork. Executives at investment bank Goldman Sachs and William Ding, CEO of Chinese website portal NetEase, have all invested in pigs.
Wuhan Steel's budget for non-core activities will equate to nearly 20 percent of the company's 2011 sales and more than 10 times its profit. That reflects the urgent need for diversification among Chinese steel mills facing an industry glut.
It makes sense, especially because demand for steel is expected to continue slowing this year.
Premier Wen Jiabao last week reduced China's 2012 economic growth target to 7.5 percent, the first time the government has lowered its annual target since setting it at 8 percent in 2005.
A slowing pace of economic expansion, compounded by the government's plan to move from investment-dependent growth to consumption-driven is a credit negative for Chinese steel mills, Moody's said in a Monday report.
The ratings agency forecast China's steel demand to grow 5.7 percent in 2012, slowing sharply from the 11.1 percent average annual growth during the previous three years.
Major projects completed
"The moderation of steel growth this year and next reflects the completion of most of the Chinese government's major infrastructure projects that were part of a 4 trillion yuan stimulus package" announced following the 2008 global financial crisis, said Jonathan Lee, senior analyst at Moody's Investors Service.
"If the government further slows the country's infrastructure construction or scales down its welfare housing projects, the demand for steel will weaken beyond what we have projected," he said.
The construction sector in China accounts for more than half of China's steel demand.
BNP Paribas analyst James Clarke agreed, saying that demand for construction steel remains weak, although demand from non-construction sectors has shown signs of some improvement.
"Demand for construction steel has yet to rebound, despite positive signals from the developers we met," Clarke said, adding that he doesn't expect the government's public housing construction plans to support steel demand materially.
To cope with the stalled market, said Lee of Moody's, Chinese mills will have to cut capital expenditure, lower capacity utilization rates and reduce selling prices.
Shanghai-based Baoshan Iron & Steel Co said on Monday it will leave April prices for major products unchanged from March, signaling the industry's uncertain outlook about market demand.
The monthly pricing policy by Baoshan Steel, China's largest listed steel company, is always seen as a bellwether for the rest of the industry. After leaving prices flat in January and February, Baoshan Steel raised prices a little in March, anticipating a seasonal demand recovery.
Lee said Moody's doesn't expect a repeat of earlier, large-scale government stimulus programs or any easing in monetary policy. That means the Chinese steel industry will be forced to adapt to the new environment.
Adaptation, in this case, could mean finding non-steel sources of income.
At Baoshan Group Corp, parent of Baoshan Steel, non-steel businesses contributed more than half of group profit last year but a far smaller proportion of its revenue, Baosteel Chairman Xu Lejiang was quoted as saying in Beijing last week by China Business News.
Diversification theme
Xu said he sees such diversification as a contingency measure until the steel industry recovers. He also said mills should be careful and selective when branching out into other businesses.
Baoshan Steel, which remains focused on its core steelmaking, has warned that net profit last year may have fallen 43 percent. The company is due to report its earnings on March 31.
At Wuhan Steel, non-steel activities last year accounted for nearly 60 percent of the company's profit, helping it to show a 17.4 percent rise in net. Deng said the current stagnation in steel demand could last another three to five years.
While pig farming has grabbed a lot of attention, most of Wuhan Steel's non-steel spending will be in allied fields of processing, technology and mining. A services company will also be established to aid the local community, Deng said.
As for pig farming, those rushing into the sector should probably be cautious about a glut developing there, too, especially given the government's commitment to bring down inflation. Food costs, led by pork, have been the main driver of China's inflation.
That included a hog-raising plan announced by Wuhan Iron & Steel (Group) Corp President Deng Qilin, which reveals just how far China's steel industry has sunk after getting squeezed by weaker demand and higher raw material costs.
Deng told the media earlier this month that pig farming will be part of the 39 billion yuan (US$6.2 billion) investment budget for non-steelmaking activities this year at the central China-based company.
He noted that a reinforced steel bar sells for around 4,700 yuan a ton, or 4.7 yuan a kilogram. The cheapest pork, by contrast, sells for 26 yuan a kilo.
Deng's remarks immediately grabbed media headlines, though a company spokesman later tried to damp the hype by noting that pigs would eat up only a small portion of the company's non-core business spending.
Pigs are actually no laughing matter. Hog farming has become a hot investment theme in China, the world's largest consumer of pork. Executives at investment bank Goldman Sachs and William Ding, CEO of Chinese website portal NetEase, have all invested in pigs.
Wuhan Steel's budget for non-core activities will equate to nearly 20 percent of the company's 2011 sales and more than 10 times its profit. That reflects the urgent need for diversification among Chinese steel mills facing an industry glut.
It makes sense, especially because demand for steel is expected to continue slowing this year.
Premier Wen Jiabao last week reduced China's 2012 economic growth target to 7.5 percent, the first time the government has lowered its annual target since setting it at 8 percent in 2005.
A slowing pace of economic expansion, compounded by the government's plan to move from investment-dependent growth to consumption-driven is a credit negative for Chinese steel mills, Moody's said in a Monday report.
The ratings agency forecast China's steel demand to grow 5.7 percent in 2012, slowing sharply from the 11.1 percent average annual growth during the previous three years.
Major projects completed
"The moderation of steel growth this year and next reflects the completion of most of the Chinese government's major infrastructure projects that were part of a 4 trillion yuan stimulus package" announced following the 2008 global financial crisis, said Jonathan Lee, senior analyst at Moody's Investors Service.
"If the government further slows the country's infrastructure construction or scales down its welfare housing projects, the demand for steel will weaken beyond what we have projected," he said.
The construction sector in China accounts for more than half of China's steel demand.
BNP Paribas analyst James Clarke agreed, saying that demand for construction steel remains weak, although demand from non-construction sectors has shown signs of some improvement.
"Demand for construction steel has yet to rebound, despite positive signals from the developers we met," Clarke said, adding that he doesn't expect the government's public housing construction plans to support steel demand materially.
To cope with the stalled market, said Lee of Moody's, Chinese mills will have to cut capital expenditure, lower capacity utilization rates and reduce selling prices.
Shanghai-based Baoshan Iron & Steel Co said on Monday it will leave April prices for major products unchanged from March, signaling the industry's uncertain outlook about market demand.
The monthly pricing policy by Baoshan Steel, China's largest listed steel company, is always seen as a bellwether for the rest of the industry. After leaving prices flat in January and February, Baoshan Steel raised prices a little in March, anticipating a seasonal demand recovery.
Lee said Moody's doesn't expect a repeat of earlier, large-scale government stimulus programs or any easing in monetary policy. That means the Chinese steel industry will be forced to adapt to the new environment.
Adaptation, in this case, could mean finding non-steel sources of income.
At Baoshan Group Corp, parent of Baoshan Steel, non-steel businesses contributed more than half of group profit last year but a far smaller proportion of its revenue, Baosteel Chairman Xu Lejiang was quoted as saying in Beijing last week by China Business News.
Diversification theme
Xu said he sees such diversification as a contingency measure until the steel industry recovers. He also said mills should be careful and selective when branching out into other businesses.
Baoshan Steel, which remains focused on its core steelmaking, has warned that net profit last year may have fallen 43 percent. The company is due to report its earnings on March 31.
At Wuhan Steel, non-steel activities last year accounted for nearly 60 percent of the company's profit, helping it to show a 17.4 percent rise in net. Deng said the current stagnation in steel demand could last another three to five years.
While pig farming has grabbed a lot of attention, most of Wuhan Steel's non-steel spending will be in allied fields of processing, technology and mining. A services company will also be established to aid the local community, Deng said.
As for pig farming, those rushing into the sector should probably be cautious about a glut developing there, too, especially given the government's commitment to bring down inflation. Food costs, led by pork, have been the main driver of China's inflation.
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