By Ren Xingzhou & Li Bu

Research Report No 197, 2006

I. The Main Features of China’s Circulation System for Steel Products

1. The modes of steel product distribution are moving toward diversification

As a result of China’s accelerated industrialization and the rapid development of its steel industry, the modes of steel product distribution have experienced splitting and integrating since 2002. With its functions constantly improving, steel product circulation has become an important component of the productive service industry.

Currently, steel product distribution in China has four main modes: steel producer → dealer → specialized steel market → end-user; steel producer → dealer → end-user; steel producer → processing and distribution center → end-user; steel producer → end-user. In general, dealer and dealer plus steel trading market are the two leading modes, accounting for 60 percent of the circulated steel products. But as the steelworks and the end-users have extended their operations into the field of steel product circulation, the mode of steel processing and distribution center and the mode of direct marketing have also developed rapidly, accounting for a growing proportion of the steel products traded. As a result, the dealers are facing severe pressure from competitors.

(1) Steel dealers and trading markets have increased in large numbers with improved functions

Since the end of 2002, the number of dealers engaged in steel product circulation has been growing in geometric series. Incomplete statistics indicate that by the end of 2005, China had over 1,000 steel trading markets and over 150,000 steel dealers with certain scale. Shanghai alone had about 60-70 steel trading markets and 5,000-6,000 steel trading companies.

The fact that China has so many steel trading markets and dealers has a closer correlation with the reality that the downstream industries are less organized. The main steel consumers in China are the construction units, metal processing and fabrication enterprises and engineering projects, which are large in number, scattered in location and small in scale. Individual users are noted for small demands, diverse varieties and larger uncertainties. Under such circumstances, the steelworks cannot directly meet these scattered enterprises, whose demands are relatively smaller. On the other hand, the steel trading markets and dealers can satisfy the demands of the end-users for steel products in different varieties, different qualities and different specifications and can complete the flow of steel products from the producers to the end-users. It can be said that in the course of China’s industrialization, the existence and development of the steel trading markets have effectively enhanced the efficiency of steel resource allocation and played a great role in promoting the growth of the small and medium-sized enterprises, the development of the manufacturing industry and in particular the machinery manufacturing industry, and the formation of the industrial clusters.

While the steel trading markets have grown in number, their overall quality has also become higher. First, the services provided by the steel trading markets have been improving, from purely leasing stalls to providing one-stop-shop services including industry information, e-trading, warehouse management, processing and distribution, and pledge financing. Second, the steel trading markets have improved their extent of systematization. Some large steel trading markets have gradually expanded their operations through trusteeship, chained operation and joint stockholding and have achieved scale and incorporated operations. Some other steel trading markets have established information - management platforms to group scattered dealers into interest communities, in which they pursue common interests and observe common rules. Operating in the mode of "virtual corporate groups", the dealers have both division of labor and cooperation among themselves and work together to enhance the competitiveness of the trading markets. Third, the steel trading markets have become more normalized. In order to raise their competitiveness and attract dealers and end-users, these markets have all intensified self-improvement and management of those dealers who do their business in the market.

(2) The steel processing and distribution centers have developed vigorously

The role of steel processing and distribution centersare to turn the rolled steel products into various semi-finished products or spare parts required by downstream users, through correcting, cleaning, shearing and punching according to the requirements of end-users. Then through their storage and transport systems, the centers deliver these products as fast as possible to end-users for their direct use. The processing and distribution centershave become natural products of deepening social division of labor, and have grown into a mainstream mode of steel product circulation in developed countries. For example, the steel processing and distribution center of Ryerson Inc. of the United Statesis a modern distribution enterprise, which has over 30 processing centers and whose service covers the whole continent of America.

Currently, China has about 300 steel processing and distribution centers. They can be classified into four categories according to their service recipients. The first category comprises the centers that process steel sheets used for automobiles and household appliances. There are about 200 centers, mainly engaged in sheet leveling and shearing. The second category comprises the centers that process steel products used for housing construction. There are about 20 centers, mainly specialized in bar-mat reinforcement and steel bar distribution. The third category comprises the centers that process steel products for shipbuilding and engineering purposes. There are about 10 centers specialized in processing of medium-thick steel plates, cold-bending sections and light-duty steel structures. The fourth category comprises the small centers that are engaged in the primary processing of silicon sheet, the processing of office equipment plates and shearing of color-painted steel plates for construction purposes.

Before 2002, most of the steel processing and distribution centers in China were solely foreign-owned or joint-venture enterprises. In recent years, however, there has been a sharp increase in the number of steel processing and distribution centers established by China’s own steelworks, major steel circulators and major end-users. For example, Shanghai Baosteel Group Corporation began to build its own steel processing centers in 1993. So far it has established 16 steel processing centers in Shanghai, Ningbo, Tianjin, Chongqing and other places, with a combined annual shearing capacity of 1 million tons. It is expected that by 2008, Baosteel will have 25-30 processing and distribution centers, with a combined annual processing capacity of 3-5 million tons. In addition, it will resort to integrated operation and establish a distribution system that combines trunk line transport with regional distribution.

(3) The trend that steelworks directly deal with and form strategic alliance with major end-users has become increasingly conspicuous

In recent years, steel producers and major end-users have begun forming strategic alliances in order to safeguard their interests and enhance their competitiveness. Either the steel producers directly sell products to the major end-users, or the major users directly purchase products from the steelworks. In recent years, by using the capital as the bond, Baosteel, Ansteel and other steelworks have jointly built some steel shearing& distribution centers and formed self-owned steel logistics distribution network with the allied enterprises in main steel consumption areas around China. They utilize the network and information advantage of the shearing centers and offer zero-inventory raw material management to the leading auto and appliance enterprises in China. They have established fast, efficient distribution networks within a radius of 200 kilometers in the marketing areas and created conditions for the end-users to gradually move to "zero-inventory" management with reference to the foreign mode of building materials chain stores.

Direct supply from steelworks to end-users has squeezed the space of distributors and constitutes a major impact to them.

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