Energy & Resources

Steeling its strategy

Giant Wuhan steel firm gets to grips with supply problems by buying mines

Sparks fly over WISCO’s strategy

When a mining town runs out of the mineral reserves that have long been its lifeblood, attempts at reinvention often look a little unconvincing.
That’s not stopping Daye from trying. The Hubei town’s main iron ore mine ceased operations in 2000, reporting resource depletion. But instead of calling in the landfill experts, Daye started training the tourist guides. Officials seem to think visitors might pay to peer into a large, open pit. China’s first ‘national mining park’ was born.
We can get you the address if you fancy a visit…
Things are starting to get a little desperate too 65 kilometres away in Wuhan, the provincial seat, where   the country’s fourth largest steel company, Wuhan Iron & Steel (WISCO), is headquartered.
WISCO is also struggling to reshape its business in order to survive, albeit with investments a little out of Daye’s league.
When Soviet experts oversaw the set up of the original smelting company in 1954, it seemed like a sensible idea. It was close to a domestic supply of iron ore. Transport options were readily available on the Yangtze River. But with mines like Daye closing, WISCO now has to import 80% of its iron ore from much further afield. At current prices, that is biting into the bottom line.
The state-owned company’s boss, Deng Qilin, knows it all too well. He’s a former head of CISA (the China Iron and Steel Association), the industry body charged with negotiating prices with the major foreign miners. And as WiC has reported extensively, CISA had a tough time getting what it wanted.
In fact, most agree that CISA  failed in most of its objectives. Including Deng himself: “The mining companies have the final say on prices,” he told the 21CN Business Herald. “There is no room for bargaining.”
“The cost of extracting 1 tonne of iron ore is $20, delivery costs are $56 and it is selling for $180-$190,” he further complained of the miners.  “This is a monopoly in the true sense of the word.”
WISCO is further disadvantaged relative to its domestic competitors. “[We are] located in the inland hinterland,” Deng told reporters on the sidelines of the NPC legislative meeting earlier this month, “So the iron ore shipping costs are Rmb100 higher per tonne than that of other domestic steel companies.” (According to 21CN, the firm’s profit margin is less than 3%).
But Deng has a plan to turn things around. “We’re undertaking a major adjustment of WISCO’s business model,” he explained, “and changing our focus from inland provinces to investing on the coast and overseas.”
In a tacit concession that there are already too many Chinese steelmakers, Deng’s also planning to diversify into other metals (which he hopes will account for 30% of revenues in the next five years).
A little hopeful? WISCO is optimistic on other fronts, too. “The company believes that [before 2015] it can become completely self-sufficient in mineral resources,” explains CBN magazine, based on an ambitious plan to build a new steel plant next to a port in Fangcheng in coastal Guangxi. The project is still awaiting approval from the National Development and Reform Commission (concerns about steel overcapacity loom again).
That hasn’t stopped Wuhan Steel  buying significant stakes in at least eight overseas iron ore mines to secure future supply, as well as invest in a number of other mining joint ventures. Deng seems to have dusted himself down after his disappointing time at CISA.
“With resources on hand,” he argues, “it doesn’t make sense if we don’t invest.”

When a mining town runs out of the mineral reserves that have long been its lifeblood, attempts at reinvention often look a little unconvincing.

That’s not stopping Daye from trying. The Hubei town’s main iron ore mine ceased operations in 2000, reporting resource depletion. But instead of calling in the landfill experts, Daye started training the tourist guides. Officials seem to think visitors might pay to peer into a large, open pit. China’s first ‘national mining park’ was born.

We can get you the address if you fancy a visit…

Things are starting to get a little desperate too 65 kilometres away in Wuhan, the provincial seat, where the country’s third largest steel company, Wuhan Iron & Steel (WISCO), is headquartered.

WISCO is also struggling to reshape its business in order to survive, albeit with investments a little out of Daye’s league.

When Soviet experts oversaw the set up of the original smelting company in 1954, it seemed like a sensible idea. It was close to a domestic supply of iron ore. Transport options were readily available on the Yangtze River. But with mines like Daye closing, WISCO now has to import 80% of its iron ore from much further afield. At current prices, that is biting into the bottom line.

The state-owned company’s boss, Deng Qilin, knows it all too well. He’s a former head of CISA (the China Iron and Steel Association), the industry body charged with negotiating prices with the major foreign miners. And as WiC has reported extensively, CISA had a tough time getting what it wanted.

In fact, most agree that CISA failed in most of its objectives. Including Deng himself: “The mining companies have the final say on prices,” he told the 21CN Business Herald. “There is no room for bargaining.”

“The cost of extracting 1 tonne of iron ore is $20, delivery costs are $56 and it is selling for $180-$190,” he further complained of the miners. “This is a monopoly in the true sense of the word.”

WISCO is further disadvantaged relative to its domestic competitors. “[We are] located in the inland hinterland,” Deng told reporters on the sidelines of the NPC legislative meeting earlier this month, “So the iron ore shipping costs are Rmb100 higher per tonne than that of other domestic steel companies.” (According to 21CN, the firm’s profit margin is less than 3%).

But Deng has a plan to turn things around. “We’re undertaking a major adjustment of WISCO’s business model,” he explained, “and changing our focus from inland provinces to investing on the coast and overseas.”

In a tacit concession that there are already too many Chinese steelmakers, Deng’s also planning to diversify into other metals (which he hopes will account for 30% of revenues in the next five years).

A little hopeful? WISCO is optimistic on other fronts, too. “The company believes that [before 2015] it can become completely self-sufficient in mineral resources,” explains CBN magazine, based on an ambitious plan to build a new steel plant next to a port in Fangcheng in coastal Guangxi. The project is still awaiting approval from the National Development and Reform Commission (concerns about steel overcapacity loom again).

That hasn’t stopped Wuhan Steel buying significant stakes in at least eight overseas iron ore mines to secure future supply, as well as invest in a number of other mining joint ventures. Deng seems to have dusted himself down after his disappointing time at CISA.

“With resources on hand,” he argues, “it doesn’t make sense if we don’t invest.”


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