July 13,2009

Shen Wenrong on Course to Become China's Mittal?

By CSC staff, Shanghai

In its biggest in the world but highly fragmented steel industry, can China produce it's own Lakshmi Mittal?

Lakshmi Mittal, the founder of India's Mittal Steel and the chairman and CEO of the international ArcelorMittal, the world's largest steel company, has changed the face of the steel industry, in the process becoming the wealthiest Indian citizen and the fourth-richest person on the planet. But now, hurt badly by the global slowdown, for the first time in three decades his mammoth enterprise posted quarterly losses last year and saw another negative balance sheet in the next quarter.

Meanwhile, China's king of steel, Mr. Shen Wenrong, has taken his company, Shagang Group, onto the Fortune 500 list, the only private Chinese company so situated. He is already the richest person in China and his company is the third biggest steel company in the world's biggest steel market.

Shagang's entrance into the Fortune 500 club benefits from China's booming steel industry.

In the second half of 2008, as China's steel industry was feeling the effects of the global financial crisis, the government's huge economic stimulus directly boosted steel demand. Even at the end of last year, the industry's low point, domestic steelmakers'  production was cut 10% at most. Recently, monthly steel production has steadily hit new highs, while steelmakers of other countries are still cutting production by 20% to 30%.

Last year, Shagang's sales income and profit reached 145.2 billion yuan and 14.8 billion yuan, respectively, and the company has become one of China's top three steel producers.

As most steel companies are still working to avoid losses, Shagang has seen profits for six straight months. As most state-owned steel companies were cutting employee compensation in the second half of last year, Shagang was doing the opposite. Shagang's asset liability ratio totals only 57%, and the company has extensive credit lines from commercial banks.

But its is not merely that fortune has smiled on Shagang. In its competition with the enormous state-owned steelmakers Baosteel and Nanjing Iron & Steel, Shagang has excelled them in product diversification and marketability.

Steel industry insiders label Shagang Chairman Shen Wenrong "as strong as iron." Shen works at least ten hours every day, and seems never to tire of it. And he is very well versed in cost control. Shagang is famous for being a "lean" company. The managerial staff accounts for only 5% to 6% of the company’s total employees, and five to six senior officials share an office. More surprising is that the company has no special cleaner. Every department is in charge of cleaning its special area. Before the start of every day's work, every employee needs first to do the cleaning.

After investing billions of yuan in the recycling area, 95% of Shagang's wastes are now recycled, bringing the company about 2 billion yuan every year.

Shagang began to control or buy into steel companies in Jiangsu and neighboring provinces in 2005, and quickly became China's largest private steel company. In 2008, Shagang's crude steel production hit 22.89 million tons, accounting for nearly 50% of the total crude steel production in Jiangsu Province.

Gong Sheng, vice president of Shagang, said it is estimated its production volume this year will equal last year's and will reach 30 million tons in 2010. The increase is expected to come mainly from new acquisitions.

But Shen Wenrong is not anxious at present to acquire more companies, for he thinks now is not the best time for M&A. Gong Sheng says that unlike other big steel companies focusing on steel makers with all manner of products, Shagang hopes to acquire galvanized sheet and cool-rolled sheet makers to enrich the company's product lines.

Shagang has no new plans for the development of iron ore resources, and thinks the overseas acquisitions of many Chinese enterprises have raised resource prices. Earlier Shagang bought into one of BHP Billiton's iron ore mines and acquired a listed mining company in Australia, with an iron ore reserve of 800 million tons.


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