It’s hard to claim that the foreign media in China is overlooking important stories when there’s political unrest out West, so I’ll forgo the finger-pointing and merely suggest that – at some later date – it’s worth looking into the momentous importance of two pieces of somewhat related steel-related news from the last week. Both are arcane, I suppose, but they have serious consequences for China-based manufacturers – both Chinese and foreign – who crave the world’s most popular metal.
Event #1. On Wednesday, the National Development and Reform Commission [NDRC] approved Baosteel’s acquisition of Guangdong-based Shaogang Steel and Guangzhou Iron & Steel. For those who don’t follow the industry – Bao is China’s largest steelmaker, very state-owned, and extremely influential in Chinese industrial circles. The two acquired companies are also very large and very state-owned. I’ll discuss the consequences in just a moment.
Event #2. Actually, more a set of events. According to the Wall Street Journal and other outlets, “spot” purchases of iron ore from Australia’s Rio Tinto are being held up at Chinese ports [the China Iron & Steel Association is denying this - unconvincingly]. Briefly – most large steelmakers negotiate annual “bench price” contracts for iron ore, leaving smaller steelmakers to purchase their ore on the more expensive “spot” market. In China, Baosteel is the designated negotiator for China’s state-owned steelmakers. Thus, the net effect of a delay in “spot” shipments will be felt – disproportionately – among China’s smaller steel makers.
And that may very well be by design.
For at least the last five years, the NDRC has made no secret of its desire to consolidate China’s steel industry into a closed association ruled by Baosteel, Anshan-Benxi Steel, Shougang-Tangshan Steel, and Wuhan Iron and Steel that – by 2020 – should control roughly 70% of China’s steel production. It’s no accident, either, that these four companies are state-owned, and – though they may be publicly listed – they are very much creatures of the Old Economy.
Last month Caijing had an interesting piece on the improving prospects for China’s private steelmakers that focused on the largest one – Shagang – in Jiangsu Province. Among the revelations: Shagang’s current survival and success is largely predicated upon a close relationship with … Baosteel. I touched on some of these issues in a recent piece for the National Interest.
Do you see this happening becuase the state wants to control things to control things, or is it because the state wants its steel companies to be big so that it can clamp down on their polluting aspects better?
“consolidation” means becoming a more monopolistic market ? Great move to become a market economic. This is another great leap forward moment.
In regard to the first question – you’re absolutely right to bring pollution into this. In general, the small a metal making facility (and I’m not just talking about steel here), the greater its environmental footprint (ie, water emissions, air emissions, etc). And, for quite a while, SEPA has rightly cited this factor in particular as a reason to consolidate the industry.
But SEPA isn’t the agency that has the power to create this kind of change. That role belongs to the China Iron & Steel Association and the NDRC – and the former, in particular, has been quite clear that the reason it actively supports consolidation is to bring “rational” pricing to the steel markets. Last April I was at a China metal conference in Tianjin where a gov’t speaker announced that there were plans to further restrict the number of ore importers so as to provide greater purchasing power to those who remain – this produced the loudest, and longest, standing ovation of the conference.
For me, personally, I find all of this a bit demoralizing. Call me naive, but I’ve always been a big fan of the changes that the market can bring to China’s SOEs. I suppose, market il-liberalization, too, can bring changes. But more likely than not, those changes will result in inefficiencies and lowered quality (I’m talking about what I see happening in the steel markets, now). For example, last week’s announcement that half of Shanghai’s construction steel doesn’t meet government quality standards. That’s a much more likely result in a market that restricts competition.
Right to bring pollution in to it? Given all of the ink and state muscle/finances put in to opposing the BHP-Rio Tinto deal, the notion that state-orchestrated consolidation among the Chinese steel producers is about pollution is silly. (And the use of an “or” by China Law Blog above frames the question as a good ol’ fashioned false dichotomy.)
It’s not a matter of control for controls sake or pollution. It’s about a frame of mind where the leadership believes bigger is better in terms of international competition. Temasek and Cheung Kong providing the template for the current leadership.