Wuhan Iron and Steel: A Classic Case

China is proud of its steel industry.

Since the days of Mao Zedong, the steel industry has been seen in China as a sign of the country’s industrial virility and investment has been a priority of previous, if not the present, five-year plans.

But you can have too much of a good thing, and an interesting article by John Gapper in the FT suggests China’s steel industry is way past the point of too much.

Taking Wuhan Iron and Steel (WISCO) as an example, the article looks first at the vast scale of Chinese steel mills. Having absorbed competitors, WISCO has doubled its size in five years, becoming the world’s sixth-largest steel group by tonnage. From a profitability perspective, though, it is a massive failure – its shares trade in Shanghai at a fifth of the value four years ago during the post-stimulus euphoria, as output continues to rise, as steel prices fall.

Wuhan Iron and Steel: A Classic Case
WISCO is typical of state-owned steel enterprises in China. Employing 300,000 people directly or indirectly in the Qingshan plant alone, it is a major part of the local economy of Wuhan, a rapidly expanding city of 10 million in Hubei province. The local province supports the company because of its pivitol role in employment in the area, even though the firm and steel industry overall desperately need to cut capacity.

China produced 720 million tons of steel last year, but according to Gapper, is making at least 20 percent too much steel. Unfortunately, in spite of Beijing’s urgings, there is no appetite for rationalization. At best, the largest buy out the smallest and call it “sustainable consolidation,” but capacity isn’t being cut, it’s just being shielded in ever-larger “too big to fail” state enterprises.

Globalize, Y’all!
According to the article, China would like the problem to be taken off its hands by turning WISCO and the other top five Big Steel companies – including Baosteel of Shanghai and Hebei Iron and Steel – into global companies.

It would like other countries to let them go global, through mergers and acquisitions, maybe take over or merge with a U.S. Steel or a Nucor. In this light, Anshan Iron and Steel’s 14% stake in Steel Development of Mississippi, with plans to build five mills, could be seen as a Trojan horse. But expansion abroad would simply export China’s problem onto some else’s doorstep.

The Bottom Line
Supported by low-interest rate loans from state-owned banks, tax breaks and other forms of official support, China’s state-owned steel companies have grown into ailing inefficient behemoths. Rather than a token of China’s virility, they are an example of all that is bad about state-sponsored investment.

Unfortunately, rather like Western banks, they are considered too big to fail and with little appetite to reform, consolidate or re-structure, the industry expansion overseas is seen as a desirable alternative – at least from Beijing.

by Stuart Burns