Forging a manufacturing empire? Hebei Iron and Steel

Heibei Iron and Steel is in the vanguard of China’s manufacturing companies which are going global in the search for new assets in an effort to expand and at the same time hedge their bets against a domestic manufacturing sector which is facing the spectre of uncompetitiveness. While this state owned company is relatively obscure to most, it is in fact the third largest steel producer in the world and the biggest in China having outpaced its peers to become a world leader in this iconic heavy industry.

However the recent crash in the value of commodities, including iron and overcapacity in the steel industry worldwide means that the Chinese steel sector faces an uncertain future. China currently dominates global production of steel (43% of total output) and demand does not look set to rise significantly for a while now, at the same time iron ore has fallen to a ten year low of $40 a tonne with no sign yet that commodity prices will pick up soon.

Add all this to the fact that steel mills are responsible for a lot of the country’s pollution, which means governments local and national will look to curb their activities in the quest for improved air and water quality. The government has already banned further steel projects in China and plan to pare back on those older, less efficient plants which do not meet environmental standards.

Partly because of these domestic pressures Heibei has been looking abroad to expand, announcing plans for a huge steel mill in South Africa which is planned to be finished in 2019, built in conjunction with a local firm.

Hebei are also shopping in Europe, in talks with a loss making Serbian steel mill Zelezara Smederevo which has been temporarily nationalised by the government to prevent job losses, but who are keen to find a long term buyer to take it off their hands. Heibei also took a stake in Duferco a Swiss steel trader which will give it a boost in terms of trying to export and distribute its wares around the world

This acquisition strategy allows Heibei to start spreading its risk globally which in turn may help ease the pain of a squeezed Chinese steel industry.  Facing such over capacity the government may be tempted to consolidate the industry by ordering mergers or overseeing further cut backs in production in an effort to make the industry more competitive.

China stands in a unique position as it has the world’s largest share of steel production and directly controls the state owned firms responsible for its manufacture so it has more influence on the global steel sector than any other actor. Therefore the Chinese government and Heibei’s decisions and actions will have important repercussions for the steel and iron sector worldwide, expand or maintain production and drive down prices at the cost of competitiveness or cut production to try and drive up prices, but risk in the longer term losing market share and higher unemployment, China’s choices will be fascinating to follow.

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