The man of steel

Shen Wenrong’s name is probably better known in Germany than in most Western countries.

That’s because in 2001 he made the bold decision to buy the ThyssenKrupp steel mill in Dortmund.

And not just to buy it: he shipped all 250,000 tonnes of it to China too.

In order to do so, Shen sent a thousand workers to take the Horde plant apart – screw by screw – in a scene that some in the German media called ‘the ultimate Chinese takeaway’.

Residents of the Ruhr were also stunned by the turnaround time for the plant’s departure. ThyssenKrupp officials had said that it would take three years. But the Chinese workers had disassembled the plant and shipped it back to the Yangtze in less than a third of that.

The plant’s new home would be 5,600 miles away, in the city of Zhangjiagang in Jiangsu province near Shanghai. And its journey is described in the opening chapter of James Kynge’s award-winning book, China Shakes the World.

In one extract, Kynge describes how he droppped in for an unscheduled meeting at the steel mill.

He spotted a queue of managers standing by a desk (“no bigger than a school child’s”) that belonged to a large man. Kynge guessed that this was Shen and joined the queue.

Shen then grants Kynge a meeting and reveals the price of uprooting the Horde plan: a mere $24 million for the German mill itself, $12 million for its transportation, then $1.2 billion for its reconstruction.

All told, Shen tells Kynge he’s got a bargain. He’ll get 3 million tonnes more output than the Germans managed, for 60% of the price of a new plant.

“When the next crash in world steel prices comes, and it will certainly come in the next few years,” Shen predicts, “a lot of our competitors who have bought new equipment from abroad will go bust or be so weighed down by debt, that they will not be able to move. At that time, you will see this purchase was good.”

In fact, that “time” has proved to be the past year.

Shen’s 2004 forecast was prescient. Steel prices have plummeted – between July and October last year the country’s steel price index fell 53.7 points to 108.6 points.

As a result, the Chinese steel industry has haemorrhaged losses. The industry’s association surveyed 71 of the biggest producers last November and found that they were a combined Rmb12.77 billion ($1.86 billion) in the red.

But Shen’s company, Sha Steel, bucked the trend. It was profitable in the first six months of this year too.

As Shen told the monthly magazine China Entrepreneur, Sha Steel has also suffered from the financial crisis and the ensuing downturn.

But the situation has not hurt the firm’s “backbone”; in part because of decisions like the one to buy the low-cost Horde plant in 2001.

In the following years Shen has also been able to beef up Sha’s economies of scale via acquisitions (for example, of Henan Yongxing Iron and Steel).

China has at least 1,000 iron and steel smelting facilities but Shen intends to become a dominant producer.

“If only two steel companies survive in China, I must be one of them”, he told the magazine. The other, he says, is the nation’s largest, Baosteel, a state-owned colossus.

But if Shen was astute enough to forecast the steel industry’s coming crisis, one thing he didn’t predict was guojinmintui.

The expression literally means ‘the states advances, as the private sector recedes’ and in recent months it has become a favourite topic for the local media. Newspapers have cited numerous examples of China’s largest state-owned enterprises swallowing up their privately-owned brethren.

The subject was discussed in the last issue of WiC (see page 7, where we coined the term the ‘Jingdezhen model’ to discuss the trend).

One example a little too close to home for Shen is that of Rizhao Steel – another successful, privately-owned (and profitable) steelmaker.

Rizhao was acquired last week by (loss-making) Shandong Steel. Rizhao’s owner,

Du Shuanghua, was a reluctant seller and it doesn’t look like he was given much of a choice. The buyer financed the acquisition through state bank loans and seems to have paid only a third of Rizhao’s estimated market value.

China Entrepreneur goes on to describe an “atmosphere of paranoia” among the owners of the country’s privately-held steel firms.

Speculation abounds – when Shen was out of the country for a month, the rumour went out that he was ‘on the run’. Shen says he was amused by calls at midnight asking if he was ever coming back. But he then points to a blast furnace and says: “I have all my assets and a lifetime of effort here.”

Still, in a recent profile of the steel magnate, Qilu Weekly baldly asked: “Will Shen become the next Du Shuanghua; will Sha Steel become the next Rizhao Steel? Perhaps the future for the 63 year-old will not be easy.”

Then again, the future has never been easy for Shen.

He began life as a peasant farmer, having dropped out of school to work in the fields.

His street smart then got him a much-coveted factory job in a textile firm and soon saw him switch from manual labour into management.

His big break came in the mid-1970s, when the firm wanted to expand but lacked the steel to do so – at that time quotas were still in place. The factory was in the small town of Jinfeng and Shen figured no one would notice if they built their own blast furnace and made their own steel.

So he built a primitive mill from scratch. His ‘learning by doing’ approach and general chutzpah proved timely in 1980s China. As the reform era unfolded Shen saw a building boom ahead and figured there would be a big need for steel window frames. He soon became a dominant player in this lucrative niche.

From there he acquired other nearby mills; and further boosted capacity by first buying a small steel mill in England and later the gigantic Dortmund plant (doubling Sha’s ouput at a stroke).

In 2000 he also spotted the coming car boom. That’s one reason why he liked the Horde plant: it provided steel for Volkswagen cars in Germany, and Shen figured the same plant could supply Volkswagen’s nearby plant in Shanghai. As well as other car factories too.

By 2008 Sha Steel had made it into Fortune’s Global 500 business list, ranked 444, with revenues of $20.8 billion.

Its current annual production capacity is 10 million tonnes of iron, 15 million tonnes of steel, 15 million tonnes of rolled products, as well as 1.2 million tonnes of stainless steel strip.

According to its website, it ranks among the 23 most competitive steel firms in the world, and has become the “nation’s largest civilian-run enterprise”.

Shen’s goal is to list Sha on the Shanghai Stock Exchange.

But as he told Qilu Weekly, the government has been trying to limit access to the capital markets to state-controlled firms. This makes it a challenge to raise new funds.

“There are no private steel enterprises directly listed,” he observes. And in the current environment of guojinmintui that may not change soon either.

---

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.