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China's steel industry must consolidate: analyst

Keywords: Tags  Steel Success Strategies conference, Accenture, John Lichtenstein, catherine ngai

NEW YORK — As the Chinese steel industry slows down, major consolidation efforts and foreign markets will play a role in sustainable growth in the Asian nation, according to John Lichtenstein, managing director of Accenture Plc’s global metals industry practice.

"This is a really interesting time for the steel industry in China," Lichtenstein told AMM on the sidelines of the Steel Success Strategies XXVII conference in New York co-sponsored by AMM and World Steel Dynamics Inc. "After over a decade of rapid double-digit growth ... market growth has stopped, at least in the short term. Meanwhile, the momentum from all the capacity growth continues."

A large majority of Chinese steels mills lost money in the fourth quarter of 2011 and the first quarter of 2012, Lichtenstein said, which led mills to reconsider their strategies. "It was an awakening type of experience. You’ve suddenly got people talking about improving operations and profitability," he said. "They’re discussing how to shift the focus from growth to making stronger, sustainable enterprises."

Overcapacity remains an issue in China, with mills continuing to produce at high rates as demand starts to drag its feet. One solution, Lichtenstein said, is for mills to consolidate in order to become more efficient. "There are too many people chasing the market, causing an inefficient allocation of raw materials and transportation," he said. While business mergers are not new for China, most recent mergers were "in name only," with little work done on restructuring and integration.

Most of China’s inefficiency problems, as well as the large number of producers, stem from the sudden growth that occurred in the early 2000s, after the government released its 10th Five Year Plan, Lichtenstein said. "The demand for steel exploded. The pre-existing large state-owned enterprises weren’t able to grow fast enough. You had a massive entry and creation of new businesses at the provincial or city level to meet the new demand."

On the political front, Chinese President Hu Jintao must step down in October after a decade in power. Although it is widely assumed that Vice President Xi Jinping will take the reins, many remain on edge due to the uncertainty.

"On one hand, you have an increasing urgency and need for action. On the other hand, I see a lot of wait-and-see," Lichtenstein said. "As we’re in this run-up to October for leadership ... a number of steel companies and state-owned enterprises are kind of in a ‘holding pattern’ with respect to taking any new bold action."

Amid the uncertainty, Chinese producers have set their sights on international markets. Chinese steel exports in May climbed to 5.23 million tonnes, the highest level since June 2010, according to China customs data, as some mills continued to increase production despite falling domestic demand and lower prices.

"The immediate concern is a surge in direct steel exports. This has been the perennial concern as people outside of China watched the growth in capacity over the years and saw the growth in capacity overtake growth in demand," Lichtenstein said, noting that a growing number of trade disputes may put a halt to that trend.

"I think the vision that the government has is that key industries are not only leaders locally but leaders globally. ... As the global industry is going through challenging times through the next year, there will be assets and companies that are for sale. I would say the Chinese producers will be taking a hard look at them," he said.

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