OPINION Steel Industry Requires More Than a Trim

OPINION Steel Industry Requires More Than a Trim

On June 26, Wuhan Iron and Steel Co. Ltd. and Baoshan Iron and Steel Co. Ltd., two of China’s largest state-owned steelmakers, announced the suspension of trading in their respective shares on the Shanghai Stock Exchange from June 27 while strategic restructuring takes place.

According to their announcements, the two listed companies would publish further details of the restructuring five trading days after the suspension of share dealing.

The restructuring is not breaking news, as speculation has circulated since Ma Guoqiang, former General Manager of Baoshan Iron and Steel Co. Ltd., was appointed Chairman of Wuhan Iron and Steel (Group) Corp. in June 2015. With similar product ranges, the two companies are probably price competitors in some sectors, which makes the restructuring understandable.

Given the steel industry’s serious excessive capacity, though, the key issue is that the restructuring will be meaningless if its purpose is simply to eliminate price competition. Whereas their production capacity is excessive in low- and medium-end sectors, Chinese steelmakers are uncompetitive in high-end sectors. Therefore, the purpose of steel industry restructuring must be to improve product ranges and technologies instead of merely eliminating price competition.

The two steelmakers are both competitive in the international market in terms of quantity rather than quality. In high-end sectors, neither of them is sufficiently competitive. Driven by the powerful growth of the real estate market, which lured steelmakers to expand capacity in low-end products, the steel industry experienced years of prosperity, and few steel producers devoted resources to the technological development needed for high-end products. No Chinese company, for instance, engaged in the research and development (R&D) necessary for producing high-end electric cookers. Consequently, better-quality electric cookers made in Japan attract more market share than others.

Obviously, restructuring the two steelmakers must prioritize improving the range and quality of products while cutting excessive capacity and making production more efficient. The two companies must realize that simple restructuring while maintaining the current product range and quality will make it impossible to fundamentally reverse their low profitability. On the contrary, more problems may arise, such as further layoffs, losses and heavy debt burdens.

After discarding redundant production capacity, the two companies must develop new products and technologies as soon as possible. Only in this way can they effectively avoid the problems of more redundancies and greater financial losses. After restructuring, therefore, the two companies must focus more on reorganizing their technology and R&D resources.

Combining the two companies’ management strengths to compensate for each other’s weaknesses is certainly a goal that restructuring must achieve. Both firms have their own advantages in management, but they both share the weakness of steel companies; they have both market-oriented ideas and old ideas inherited from the planned economy.

More importantly, the two steelmakers should not regard restructuring as the end of reform, believing that it will solve all their problems. If they don’t obey market rules, establish modern corporate systems or become real market players, they will face more difficulties and problems.

The State-Owned Assets Supervision and Administration Commission (SASAC) of the State Council, the investor and manager of centrally administered state-owned companies, must also adopt an open approach to the restructuring of the two steelmakers, transforming the new company into a state-capital-invested company in which the SASAC maintains responsibility only for the investment of state capital and refrains from intervening too much in corporate operations.

Steel companies are usually very large in size. After Baoshan Iron and Steel Co. Ltd. and Wuhan Iron and Steel Co. Ltd. are merged, the SASAC must be prudent in approving such restructuring between other state-owned steelmakers. If only giant companies exist in the steel industry, market competition will be affected. Whether mergers between state-owned and private-sector steelmakers can be realized is another question the SASAC must consider.

Laminar cooling equipment in a plant of Baoshan Iron and Steel Co. Ltd. in Shanghai