Baoshan Iron And Steel Essay

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Baoshan Iron and Steel Co., Ltd., is one of China’s largest and most strategically important companies. It is the publicly listed subsidiary of Baosteel Group, a Chinese state-owned enterprise headquartered in Shanghai. The subsidiary was established in February 2000. In December of that year, 1.877 billion common shares were issued and Baoshan Iron and Steel Co., Ltd., (abbreviated to “Baosteel” in English) was successfully listed on the Shanghai Stock Exchange, raising just under US$1 billion.

Baosteel is set for significant growth and expansion as a major player in the restructuring of the industry in China. The pace of Baosteel’s growth and expansion will depend upon how it deals with the challenges of a slew of anticipated mergers and acquisitions, securing strategic iron ore resources, and developing the product and process innovations necessary to underpin sustainable competitiveness.

Baosteel is the largest and most advanced steel company in China and the sixth largest in the world specializing in high-tech and high-value-added steel products. The company produced approximately 20 million tons of iron and 23 million tons of steel in 2007. Baosteel has become China’s main steel supplier to automobile, household appliance, oil exploration, oil and gas transmission, shipbuilding, pressure vessel, and container materials industries.

Baosteel’s 2007 results showed an 18 percent increase in revenues to CNY191,6bn (US$27.4 billion) with a 2.7 percent fall in net profit to CNY12.7bn (US$1.8 billion). Sharp increases in the costs of raw materials and weakness in the stainless steel market were cited as the main reasons for the profit decline. In December 2007, Standard & Poor’s revised the long-term credit rating of Baosteel from “BBB+” to “A-” with “stable outlook.”

China’s steel industry is in its golden age; however, it remains highly fragmented with Baosteel, the top producer, contributing only 12 percent of the nation’s total output. China’s Steel Industry Policy (2007) aims to consolidate the industry into several major players. A flurry of merger activity is imminent with Baoshan Iron and Steel Co., Ltd., expected to be a dominant player in the restructured industry.

Baosteel’s dynamic capabilities, critical to its current position and future success, are underpinned by the scale and growth of the domestic market. Its strategy includes product differentiation, with increased focus on high-end products and high-strength value addeds, and cost reduction through increased productivity and improved management systems. Baosteel’s strategy for market expansion includes establishing production bases abroad with the objective of increasing the contribution of overseas sales to 10–15 percent of the revenue base (currently around 3 percent) over the next five years.

In recent times, government policy has both helped and hindered Baosteel’s operations. In June 2007 export tariffs were levied on more than 80 categories of steel products in order to curb exports and secure domestic supply. Then, in late 2007, Baosteel was said to have benefited from US$52 billion in government subsidies to the industry. The Chinese government is expected to play a key role in determining future mergers and acquisitions related to the new Steel Industry Plan. From Baosteel’s perspective, the choice of targets and/or partners will have a significant impact on operations, trading, and global expansion plans.

Baosteel faces two major issues that will continue to place upward pressure on costs. China’s exchange rate policy is subject to ongoing examination by the world financial community. Should the Chinese government bow to international pressure for a sharp revaluation of the Chinese renminbi, the consequences could be significant for Baosteel and for the entire Chinese steel industry.

The second cost issue is related to the supply of iron ore, the basic raw material for steel manufacture. In recent years, the three dominant suppliers of iron ore have negotiated price increases of 72 percent (2005), 19 percent (2006), and 30 percent (2007). It is widely anticipated that iron ore mining companies in Australia will achieve an increase of approximately 85 percent in 2008, exceeding the 65 percent rise secured by the key Brazilian mining companies. The Chinese government is currently considering a joint bid, including Baoshan Iron and Steel Co., Ltd., to acquire a key Australian supplier (Rio Tinto Group) in order to protect this strategic supply chain.

Bibliography:

  1. Baoshan Iron and Steel Co., Ltd., Annual Report (2006);
  2. Baoshan Iron and Steel Co., Ltd., Fact Book (2006);
  3. People’s Daily Online, “China’s Steel Industry Ready for Change,” www.english.peopledaily.com.cn (cited March 2009);
  4. Jonathan R. Woetzel, “Remaking China’s Giant Steel Industry,” McKinsey Quarterly, www.mckinseyquarterly.com (cited March 2009).

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