Hebei Iron blazes trail for China's industrial outsourcing
These are not the best of times to be one of the mainland's massive, state-owned steel mills. The economy is slowing, competition is increasing and there is widespread disgust and impatience with the smog pouring out of their stacks. In short, their lucrative business model for the past three decades is slowly dying. So what is a manager of a mainland steel mill to do?
One surprisingly popular option is to bid the mainland goodbye. In November, Hebei Iron & Steel, the country's largest steelmaker by production, said it was moving five million tonnes, or roughly 11 per cent, of its annual output to South Africa.
According to press reports, it will not be going abroad alone. By 2023, Hebei province, the mainland's most polluted province, plans to export 20 million tonnes of steel, 30 million tonnes of cement and 10 million weight boxes of glass capacity (a weight box equals roughly 50 kilograms) to points still not named.
At first glance, the export of excess industrial capacity would not appear to make much business sense. It is not clear there is much demand in South Africa for Hebei Iron's plentiful wares. Why, then, is it doing this?
The officials in Hebei province who oversee the company may have felt they had no choice. First, they faced political pressure to reduce their environmental impact in the country. Second, Hebei may simply be at a loss as to how to scale back massively bloated businesses.
The effect on the mainland's domestic steel prices has been devastating. Consider the price in Shanghai for steel reinforcing bar, which fell 29 per cent last year. That drop was largely precipitated by the country's economic slowdown (and the slowest growth rate since 1990).
So where is the steel going in the absence of a strong domestic market? During the first 11 months of last year, the mainland exported 86 million tonnes of steel (almost equal to total US production in 2013), up 47 per cent a year earlier. But the export market is hardly a sustainable bet in the long term, especially at a time when the United States and other importing countries are erecting anti-dumping duties on mainland steel.
For a company looking for long-term growth and significant capital to invest, that only leaves one choice: go global. But unlike in the past, when going global had served as a nice long-term goal, today's "going global" strategy has taken on urgency.
The State Council has announced that Beijing will further promote "going global" by mainland firms, including with financial assistance. As described by the government, the goals are twofold. First, the country is keen to see its flagship firms become internationally competitive - so much so that it is willing to encourage even quixotic forays abroad. Second, bankrolling such expansion is a signal that it wants better returns - in the form of profit and political influence - on its foreign-exchange reserves. Though Hebei Iron announced its South African plans two months before the State Council's announcement, it is all but certain that it is benefiting from the promised subsidies.
Will it work? In the short term, just by virtue of adding so much unneeded capacity to South Africa's steel trade, Hebei Iron will likely create a smaller version of the saturated market that is hurting it in Hebei. But just as the mainland's domestic steelmakers turned to exports when local markets were not generating sufficient demand, Hebei Iron will likely count on using its newly built South African mill to meet demand in emerging Africa.
To be sure, it is hardly a safe bet. But so long as Beijing appears incapable of fostering a climate in which companies want to invest, it might just be the best one available - and one that other mainland companies are also likely to soon embrace.
