The whole hog

More profitable than steel rebar?

Accounting for more than half of all the meat consumed in China, pork is integral to the national diet, with demand expected to outstrip supply by two and a half million tonnes this year, the China Daily reported. This has led to a situation where the price of pork in China is 86% higher than in the US, says Reuters.

That makes rearing pigs look like it might be a lucrative business, especially compared to industries where the supply-and-demand story seems much less convincing – like steel, for instance.

It may seem like an unlikely comparison but it’s one that is being taken seriously by the management at Wuhan Iron and Steel Corporation (Wisco). The Hubei-based company recently outlined plans to set up a pig farm of its own, with slaughtering scheduled to start within the year, reports CBN.

And that’s not all. The company intends to invest as much as Rmb39 billion on businesses beyond its traditional focus. This is equivalent to 20% of 2011 turnover and 10 times last year’s profits.

Some of the proposed investments are closer to Wisco’s industrial background, including ventures in overseas mines, as well as waste processing. The more offbeat proposals include pig and vegetable farming, and the company also has plans to enter the services industry, including caring for the elderly.

Wisco’s broadening business scope highlights the struggle for survival among some of China’s steel producers. Income from its non-steel business accounted for 70% of the group’s profits last year. In fact, they were essential in supporting Wisco’s 17.4% increase in reported profit for the year. Compare that performance to the woeful profit margins in the Chinese steel industry (averaging just over 3% in the past two years, according to the China Iron and Steel Association (CISA).

An article in the People’s Daily sums up the reactions to Wisco’s new strategy. Those who approve think that Wisco is showing foresight by diversifying out of a tough industry. But others think that the steel company is ignoring orders from Sasac, the government body in charge of the central enterprises, which has demanded that large state-owned companies focus on their core business.

Steel margins look like dipping further in the immediate future, with the property market now slowing noticeably. A prolonged construction boom helped keep steel demand growing at an average rate of 15% for the last decade, reports the Financial Times. But Gu Jianguo, chairman of Maanshan Iron and Steel, has warned recently of the sector’s “grave difficulties” as the property market cools, says MarketWatch. Gu also said that steel would be China’s weakest performing commodity this year.

CISA seems to concur, reporting that demand growth fell to 8% in 2011, and predicting that it could drop to 4% this year.

Declining iron ore prices are also being taken as a leading indicator for steelmakers. Since September, import prices for iron ore have fallen from $200 to a low of $117 a tonne. Prices have recovered somewhat, to around $135 a tonne, but the future trend isn’t expected to be upward.

Wang Xiaoqi, vice chairman at CISA, also told an industry conference last month that ore prices were on a “declining path” and that he saw the price downturn as “a clear signal”. Wang predicted ore prices could drop to below $110 a tonne if China’s steel market loses further momentum.

Against this backdrop, perhaps pig farming is a more attractive option. Nor is Wisco alone in going down this path. China’s most famous pig entrepreneur is probably Ding Lei, the entrepreneur behind online company NetEase, reports Yangcheng Evening News. Liu Yonghao’s New Hope Group also intends to invest Rmb5 billion to raise three million pigs. And even foreign investment banks have invested in pig farms in Hunan and Fujian, reports the newspaper.

Pig farming is hardly a risk free business. The industry has suffered from dramatic market fluctuations, some of them disease-related. In 2010, it was hard to make any profit at all on a hog, reports CBN. But last year each one could bring in up to Rmb700 in profit.

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