Steel industry: similar to the four trillion stimulus policy like opium

The head of Baosteel Group, one of China’s leading steel companies, appears to have a different perspective from many of his peers in the industry. At the recent academic annual meeting of the 5th Baosteel, Chairman Xu Lejiang expressed his views on the current state of the steel sector with an unusual tone. He said, “The winter of the industry has not yet arrived—it’s still late autumn. As for when spring will come, I think this long period isn’t necessarily bad. It gives us time to reflect and transform.” This statement suggests that Xu believes the worst is not yet here. The industry hasn’t fully faced its challenges, and the most vulnerable players haven’t been exposed just yet. One key factor supporting this view is the sharp rise in steel production during the first quarter of this year. According to data, China produced 191.75 million tons of crude steel between January and March—setting a new quarterly record and rising 9.1% year-on-year. This growth far outpaces the 2.5% increase seen in the same period last year. Xu attributed this surge partly to lower iron ore prices at the end of 2022, which led steel mills to stock up and maintain high operating rates. However, he noted that the government hasn’t introduced another large-scale stimulus package like the "four trillion yuan" plan from previous years. While urbanization and consumption are still being promoted, demand remains weak. The result of this overproduction was a massive buildup of inventory in major cities, reaching historical highs by early March. This oversupply caused steel prices to fall, pushing many companies back into losses. According to the China Steel Association, profits for large and medium-sized steel enterprises declined sharply month by month: 1.338 billion yuan in January, 998 million in February, 267 million in March, and 153 million in April. Xu expects May to be worse than April, and June even worse. “More companies will exit the market in the future,” he warned, “but only if the government decides to shift the economic growth model. Previously, policies like the 'four trillion' were like opium for businesses—they provided temporary relief but didn't address deeper issues.” Currently, the few profitable steel companies are those with stable customer relationships, cost-effective operations, or large capital reserves. Many state-owned steel enterprises, burdened by outdated structures, are struggling as demand weakens and prices continue to drop. In response to these challenges, Baosteel is shifting toward service-oriented manufacturing. Xu Lejiang emphasized that while the company leads in product quality and cost control, it still lags behind global competitors in customer service. He described the concept of “service-oriented manufacturing” as focusing on the two ends of the value chain—the “smile curve.” Instead of just focusing on the bottom part of the curve (production and energy efficiency), Baosteel is exploring areas like consulting, R&D, design, and supply chain management to add more value. “Today, the steel industry is moving closer to customers, much like a car 4S shop,” Xu said. “We are involved in product design and even handle post-processing and distribution.” Baosteel has already started transforming by working closely with automakers and appliance manufacturers, setting up joint labs, and building a nationwide network of 50 distribution centers. The goal is to expand to 60 domestic and 10 overseas companies by 2018. Additionally, Baosteel is leveraging its position in the supply chain. Recently, it partnered with the Baoshan District Government to establish a steel e-commerce trading center. Not only does it sell its own products, but it also serves as a third-party platform for other steel companies, distributors, and end-users. Ma Guoqiang, general manager of Baosteel Co., Ltd., added that the platform could explore profit models beyond transactions, such as post-trade settlement, warehousing, logistics, and information services. These new areas offer significant growth potential. Experts like Academician Xu Kuangdi also highlighted the need for the industry to improve further, such as optimizing material composition, enhancing management, and strengthening customer service. By expanding into the service sector and reducing middlemen, steel companies could reclaim 2-3% of lost profits.

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