Iron and Steel Metallurgy
Current Industry Status
Domestic Situation
Overcapacity reduction in steel sector exceeded the annual target
2016 marked the launch year for resolving excess steel capacity. The steel industry fully implemented the decisions and arrangements of the CPC Central Committee and the State Council, and thoroughly advanced supply-side structural reform. A total of over 65 million tons of crude steel capacity was eliminated, exceeding the annual target of 45 million tons set for 2016.
Both output and consumption registered growth
According to data from 2017–2021 China Steel Industry Investment Analysis and Prospect Forecast Report released by China Investment Consultants, China’s crude steel output hit 808 million tons in 2016, up 1.2% year-on-year. Domestic apparent crude steel consumption reached 710 million tons, reversing two consecutive years of decline with a year-on-year increase of 1.3%. The output of steel products (including duplicated materials) stood at 1.138 billion tons, rising 2.3% year-on-year, an acceleration of 1.7 percentage points. China’s crude steel output accounted for 49.6% of the global total, a rise of 0.2 percentage points.
Steel prices rebounded after hitting bottom
After years of continuous decline, domestic steel prices bottomed out and recovered in 2016. The comprehensive steel price index climbed from 56.37 at the start of the year to 99.51, a gain of 43.14 points or 76.5%. By product category, flat products saw a larger price hike than long products: the flat product price index rose from 56.79 to 104.60, surging 84.2%, while the long product index went up from 56.92 to 97.60, growing 71.5%.
The steel industry reversed losses to post profits
Driven by capacity reduction and rebounding market demand, steel prices fluctuated upward in 2016, enabling the industry to turn losses into gains. Key monitored steel enterprises recorded operating revenue of 2.8 trillion yuan, down 1.8% year-on-year, and a cumulative profit of 30.378 billion yuan, compared with a loss of 77.938 billion yuan in the same period of the previous year, representing a profit increase of more than 100 billion yuan.
Analysis of steel demand
In terms of steel demand from major downstream sectors, year-on-year demand shrank across all industries in 2016. Nevertheless, compared with the growth rates in 2015, construction, machinery, automobile and railway sectors showed obvious signs of recovery with markedly improved growth, fueled by rebounding real estate investment, increased infrastructure spending and better-than-expected growth in automobile consumption driven by favorable policies. By product type, the automobile industry contributed the largest increment in steel consumption, followed by the construction sector, lifting demand for both flat and long products, with flat products seeing stronger growth.
Profit performance of steel enterprises
Per data from the 2017–2021 China Steel Industry Investment Analysis and Prospect Forecast Report issued by China Investment Consultants, key monitored steel enterprises achieved operating revenue of 2.8 trillion yuan in 2016, a year-on-year drop of 1.8%, and total profits of 30.378 billion yuan, against a loss of 77.938 billion yuan a year earlier, with profits rising by over 100 billion yuan.
Incomplete statistics show around 8.5 million employees work in China’s coal and steel sectors, making capacity reduction a highly challenging task given the massive workforce. Yet China remains resolute in cutting overcapacity. The 15th meeting of the CPC Central Leading Group for Financial and Economic Affairs held on February 28, 2017, reiterated the need to deepen capacity reduction efforts. Firm determination and concrete actions delivered remarkable results, and corporate profitability in the steel sector gradually improved. Benefiting from price recovery and full-year profits in 2016, steel mills enjoyed sound earnings and tended to increase raw material inventories to lock in profits. In 2016, domestic steel industry profits jumped 202% year-on-year, losses of loss-making enterprises fell by 51%, and overall industrial operations improved significantly.
Overseas Situation
Global crude steel capacity had reached 2.3 billion tons per annum by 2015, more than doubling the 2001 level, according to statistics from the World Steel Association (WSA) and collected data. China’s crude steel capacity accounts for roughly half of the world’s total.
The global crude steel capacity utilization rate neared a seven-year low. Alongside continuous capacity expansion, the monthly global crude steel capacity utilization rate has trended downward since 2013. In February 2016, the rate stood at 66.2%, close to the seven-year trough of 64.6%. Oversupply of steel capacity worldwide became increasingly prominent.
Industry Trends
1、It was once expected that the concentration ratio of the steel industry would rise above 80% by 2005. In fact, the crude steel output of China’s top 10 steel enterprises only accounted for 36.23% and 35.66% of the national total in 2013 and 2014 respectively, representing a distinctly low industrial concentration ratio. By contrast, the concentration ratio exceeds 75% in Japan, over 72% in the EU and 61% in the United States. Statistics show that China’s crude steel output hit 820 million tons in 2014, accounting for roughly half of global production, making China a veritable major steel producer. Nevertheless, despite ranking first in global steel output, China lacks world-class large enterprises with top-tier scale and technologies, largely due to the low industrial concentration ratio. Low concentration hinders the optimal allocation of industrial resources, weakens the effects of national macro-control, and undermines Chinese steel enterprises’ discourse power in the international market. Therefore, boosting the steel industrial concentration ratio is highly necessary, with mergers and acquisitions as the core approach. To achieve ideal results via mergers and acquisitions, three major obstacles must be overcome:
① Ensure unified market access and supervision, alongside fair, open and transparent market rules;
② Clarify and improve the property rights protection system, reasonably set equity ratios, and dispel private small and medium-sized capital’s concerns over mixed ownership economy;
③ State-owned enterprises shall reduce administrative intervention, while private enterprises shall weaken family-style management; all enterprises shall operate and manage in compliance with the modern enterprise system.
2、Steel mills will shift their management focus from cutting costs, revitalizing existing assets and controlling expenses to management innovation. Production processes will be seamlessly matched to maximize capacity utilization of each working procedure, with logistics, information flow and capital flow under full control. For instance, production and processing workshops will be deployed close to customers in line with client demand, supported by a complete network for processing, cutting and distribution. This creates a comprehensive regulation center integrating inventory management, steel processing and distribution between steel manufacturers and downstream steel consumers. The unified inventory release mechanism serves logistics and information demands for both upstream and downstream players, cutting inventory costs and boosting operational efficiency for all parties.
3、The growth in steel product value will significantly outpace output volume growth in the future, driven by technological upgrading, industrial restructuring, product optimization and quality improvement. Steel products will develop toward specialty, precision and high-end varieties with intensive deep processing and high added value. Amid overcapacity and severe market homogenization, steelmakers must continuously develop new products and expand high-end application sectors including medical, aerospace and military materials.
4、Premier Li Keqiang put forward the "Internet Plus" strategy. The concept of "Steel + Internet" accelerates enterprise transformation. E-commerce development is not merely for online transactions, but for providing customer-oriented services with manufacturers positioned as comprehensive service providers. Against diverse and personalized user demands, the traditional mass customized manufacturing model can no longer meet market requirements. Enterprises must adopt the "Internet Plus" mindset to transform toward smart and intelligent manufacturing.
Solutions
Lapsen’s Plant IT™ platform greatly improves enterprise operational efficiency and reduces operating costs. As a core enterprise informatization system built on the Plant IT™ platform, it lays a solid foundation for the long-term development of iron and steel metallurgy enterprises, and effectively boosts their innovation capability and value creation capacity. Digital transformation has become imperative for the iron and steel metallurgy industry, and enterprise informatization systems significantly enhance the core competitiveness of steel and metallurgy enterprises.
The enterprise informatization system based on Lapsen Plant IT™ delivers the following core benefits:
1.It targets and effectively addresses practical operational and management pain points faced by enterprises.
2.It enables full business collaboration. Through standardized form customization and unified data invocation, the system realizes collaborative processing between purchase orders and sales orders, warehouse receipt and delivery orders, as well as collection and payment slips. It visualizes all business links, allowing enterprises to timely identify, analyze and optimize operational bottlenecks.
3.It supports standardized process collaboration. Relying on the diversified group management platform, the system implements unified supplier management, centralized price control and unified pricing policies, and coordinates distribution arrangements across regional business branches. It enables highly efficient and responsive enterprise management, helping enterprises seize competitive advantages in the market.
4.It effectively eliminates irregular operations, optimizes the utilization of production equipment, improves overall production efficiency and fully releases production capacity.
5.It assists enterprises in integrating multi-dimensional resources through collaborative management, thereby accelerating technological innovation and industrial upgrading.
