ThyssenKrupp a good example for China steel mills

China's steel makers that are suffering huge losses because of overcapacity may learn how to survive from the successful example of German company ThyssenKrupp AG.

Heinrich Hiesinger, chairman of the ThyssenKrupp executive board, said a study from the Organization for Economic Co-operation and Development reported more than 200 million tons of overcapacity in China's steel industry.

"There are very successful steel manufacturers here in China, and normally, they are professionals and do not need my advice," he said.

However, "in Europe … on a regular basis, the steel industry needs consolidation, especially with so much overcapacity", he said.

"I do believe professionals in China who see this recognize that if they want to regain earnings power, they need to start to consolidate and reshuffle the Chinese steel industry."

The Chinese government understands this, and it is nudging the steel industry to move in that direction, Heisinger said. But at the provincial level, it is not easy to accept the closure or the combination of steel firms, he added.

ThyssenKrupp is a good example of how mergers and restructuring helped. The company, a merger of Thyssen, Krupp and Hoesh, was very successful for two decades in the steel industry.

But during an assessment of the company's situation two years ago, ThyssenKrupp found its steel business too large to meet the company's targets, as the steel industry is highly cyclical and capital-intensive, and there is high overcapacity right now, which limits the potential of the steel business.

Therefore, the company decided to trim its steel business to around 30 percent of its total portfolio, and increase the share of capital goods and services to about 70 percent.

Despite the economic slowdown, ThyssenKrupp had at the end of the last calendar year the highest order intake ever in its capital-goods business.

In stark contrast to ThyssenKrupp's success is the widening loss among Chinese major steel mills. Angang Steel Co Ltd, the listed arm of Anshan Iron and Steel Group Corp, led the list of money-losers with a 4.16 billion yuan ($673.26 million) loss in 2012. Shandong Iron and Steel Co Ltd reported a net loss of 3.8 billion yuan for that year, while Anhui-based Magang (Group) Holding Co Ltd saw a 3.86 billion yuan loss due to slumping downstream demand and soaring operating costs.

"Without the mergers, none of the company … would exist anymore," Hiesinger said of ThyssenKrupp.