Energy & Resources

Run of the mill

‘Illegal’ steel firm gets licence at last

Run of the mill

Legit at last: Sha’s Shen Wenrong

Locals were stunned in 2001 when Shen Wenrong’s company took apart the ThyssenKrupp steel mill in Dortmund, and then shipped it 5,600 miles back to Jiangsu province. Experts thought the process of dismantling and rebuilding 250,000 tonnes of steel mill would take three years. Shen’s team did it in a third of that time.

But the most amazing thing of all was that Shen’s bold act was illegal. That’s because his firm Sha Steel (see WiC31) did not have a licence to operate in China. In fact, it only got one late last month, more than a decade after his German coup.

As China Economic Weekly has just pointed out in an article headlined “Sha Steel turns legal”, Shen’s firm was one of 45 companies just licenced by the Ministry of Industry and Information Technology (MIIT) to produce steel. Until this point, its operations were categorised officially as “illegal steel capacity”.

According to the 21CN Business Herald, Shen has been lobbying for a licence for years. In large part that’s because he was spooked by the so-called Tieben Incident in 2004. In April of that year then premier Wen Jiabao ordered an “emergency halt” to 8 million tonnes of production at Tieben, another unlicenced firm. Its tycoon boss Dai Guofang had spent over Rmb10 billion ($1.62 billion) building his plant, but after a marathon trial he was jailed in 2009 for five years.

Ningbo Jianlong Iron Steel was also shut down, again for lacking a licence, in 2004. A senior executive from Sha Steel told the 21CN: “The two companies are not far away from us, and we were worried that our new project – a 6.5 million tonne hot coil production line – would be stopped too.”

After dodging the Tieben Incident, Sha went on producing steel. However, the firm started to find that banks were suddenly reluctant to loan it any new capital. In Chinese terminology, Sha was also deemed a “black household” and liable for shutdown at any time. That was like a “sword hanging over Shen’s head”, comments China Economic Weekly.

Shen thought he had procured official approval from MIIT two years ago, having been told that Sha had passed its audit. But the endorsement seems to have been delayed by bureaucratic infighting between MIIT and the NDRC, the country’s economic planning agency (which has long tried to counter chronic overcapacity in the steel sector). However, with MIIT’s announcement it appears that NDRC has lost this particular turf war. (Nor is this the only bureaucratic battle the NDRC has lost recently – see WiC171 for our report on it being outflanked by Chery and local government officials in Changshu.)

Sha is not the only privately-owned firm to get approval either – 14 others have gone legit as well. The MIIT has given them a pass based on the scale of their operations and their compliance with environmental and energy guidelines. The other thirty firms are state-owned.

What does this mean for the much-vaunted consolidation process in the steel sector? The receipt of a licence suggests Sha seems to have met the scale and performance thresholds designed to weed out smaller, less-efficient rivals. By giving the go-ahead, MIIT is also granting Sha a better chance to get bank financing. Some of that might be used to acquire others and help consolidate the industry. There is a bigger theme at play here too. The victory for Shen and the other tycoon steelmakers sends out a strong signal that reform faction policymakers – who favour private business over state-led capitalism – are in the ascendant.

Previously, it seemed that the M&A plan for the industry would favour the state-owned behemoths, with operators like Sha more likely the prey. But private steelmakers may be getting the nod because they are better run. A survey of 79 privately-held mills by the Chamber of Commerce of Small and Medium-sized Metallurgical Enterprises says they made total profits of Rmb18.9 billion last year, which contrasts with losses across the industry as a whole.

But back to another intriguing stat. Those 45 firms now licenced by MIIT produce an aggregate 300 million tonnes of steel. That means that 59% of China’s steelmaking capacity is still technically illegal.

© 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.