New model to tackle excessive steel capacity

Technological upgrade

In addition to increasing exports, the steel trader can also help the Chinese company improve its technology.

"It is the first time that a Chinese steelmaker has invested in our company. Duferco has long held the belief that our long-term future lies firmly alongside the developing economies," said Matthew De Morgan, Duferco's chief executive officer. "We will help Tangsteel improve its technology and introduce its steel products to other international markets besides Asia."

"The model is rare in China, but it is very mature in Europe and Japan," said Zhang. "It can effectively tie up the interests of steel traders and steel makers, which will lead to better mutual profits."

In Japan, many large-scale steel traders own shares in steelmakers, and vice versa. They also invest in upstream resources such as mining companies to ensure stable iron ore supplies.

"It is better for companies to focus on their own strengths when the steelmakers don't need to worry too much about marketing and traders don't have to seek out enough supplies," he added.

"Among all the Chinese steel companies, Tangsteel has its own specialty to attract foreign investors," said Zhang.

China's steel industry has been suffering from rising iron ore costs and falling steel prices in recent years, with many companies suffering huge losses or weak profits.

However, Tangsteel achieved a better performance compared with other producers that focus on the production of steel sheets and plates , which form the major element of the excessive supply in the market, said Zhang.

"Tangsteel mainly produces steel products for the construction sector, which still has enough demand driven by the rising real estate market," he said. "In addition, the steel products for auto-making have been profitable."

Hu Yanping, a steel analyst with Umetal.com, said common-use steel sheet products for electronic appliances cost about 4,400 yuan ($690) a ton, while the ones for automobiles are priced at about 5,300 yuan.

Tangsteel will cooperate with Duferco in a project for high-end steel products for automobile manufacturing. The project is scheduled to start production by the end of next year, according to the Chinese steelmaker.

Despite the supportive voices, some experts warned that Tangsteel's model cannot easily be copied by other Chinese steel companies.

Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute, said the model is still in its early stages and it will take time to see whether it will be successful and cope with changes in the market.

He said there are many stages and various ways to enter other countries, not only selling steel products to foreign markets, which is possibly the major strategy for Chinese companies' "going overseas" at present.

Because of the high-energy use and environmental costs of the steel production process, the Chinese government does not encourage steel products to be exported. However, facing the current severe overcapacity problem, it does not discourage exports, either.

Zhang said European steel companies choose to expand their overseas business through establishing steel mills in foreign lands, especially in developing countries where there is growing demand.

Chinese companies need to pay more attention to local cultures and laws during this process, he said.

Meanwhile, Li said there are still potential markets to explore within the country, such as the construction and stainless steel application sectors.

Zhejiang Hangxiao Steel Structure Co Ltd, China's first listed architectural steel structure company, formed a strategic cooperation with Tangsteel on Nov 7 by signing an annual purchase contract with the latter.

Increasing construction of steel-structured buildings is an effective way to reduce construction waste and protect the environment. It also has the value of being a strategic reserve.

To address the current overcapacity situation in the domestic steel industry, the State Council, China's cabinet, issued guidance recently to address the problem by raising the percentage of steel structures in the building construction sector.