The majority of steel makers in China have extended their business into non-steel sectors in face of capacity surplus pressures in the steel industry as they find that excessive production capacity cannot guarantee high profit margins.

Large investments of capital were made by steel companies into non-steel activities in 2011. In April 2011, Jiugang Group and Zhangye city, both located in northwest China’s Gansu province, signed a contract to build a 4bnm3 coal gasification plant, with an investment of RMB22bn ($3.5bn).

In June last year, Shagang Goup, a leading privately owned steel producer in east China’s Jiangsu province, laid the foundations for its iron and steel logistics park and plans to invest RMB30bn ($4.76bn) in it.

Last November, Anshan Iron and Steel Group teamed up with the Sinosteel Corp to negotiate with Japanese Mitsubishi Group for the construction of a port in western Australia at Oakajee. The cost is estimated at US$3.25bn.

There were a number of projects with investments of over RMB10bn ($1.59bn) made in more lucrative non-steel business by steel mills last year, driven by better profits in these business compared with those of steel.

The gross profit for steel sales by Wuhan Iron and Steel Group remained at 1.67% in 2011, while that of its non-steel business reached 3.47%. Wuhan I&S predicted that the operating revenue generated from its non-steel business reached RMB60bn ($9.5bn) in 2011, with profits at RMB2.08bn ($330M), which accounted for 70% of its total profits. The company has set a target of annual sales revenue at RMB360bn ($57.1bn), with revenue of its non-steel business exceeding RMB110bn ($17.5bn) during the five-year period.

Shandong-based Jigang Group’s gross sales profit margin in 2011 was 0.71% on sales of steel, while that of its non-steel business was as high as 4.11%. The Jiugang Group unveiled on its website that the revenue of its non-steel activities was expected to amount to RMB27bn ($4.28bn) in 2011, up RMB10.4bn ($1.65bn) from a year earlier, and accounting for 27.9% of its total revenue. The profits of its non-steel business in 2011 also surged 83.5% year on year. Shagang Group also targeted RMB300bn ($47.6bn) of annual sales revenue, with operating revenue from non-steel activities at RMB100bn (15.9bn) during the 2011-2015 period.

Steel mills are seen to be increasing the proportion of non-steel. Wang Yifang, chairman of Hebei Iron and Steel Group, said that after the group adopted advanced technology, the large number of employees had become a new obstacle for the company to improve the efficiency of its limited steel business; therefore, there is a need to improve the proportion of non-steel business. The group targeted its operating revenue for non-steel business at RMB140bn ($22.2bn) with profits from its non-steel business accounting for 50% of the total by the end of 2015.
This model of diversification into non-steel activities is a model followed by several other Asian steel companies in Japan and South Korea.

Source: China Metals e-mail [email protected]