Advanced manufacturing may help firms circumvent falling margins

If the lottery system allowing people to purchase automobiles in first-tier cities was expanded to all major cities across the country, it would be a big damper for the country's steel industry.

China's steel industry has been suffering from overcapacity and declining demand this year, while major producers have increasingly focused on the automobile market, which can bring higher profits.

However, with an economic slowdown and the lottery policy, steel products for automobiles have been declining this year, said Zhang Tieshan, an analyst from steel information provider Mysteel.com.

"The sales of heavy machinery vehicles have declined more dramatically than the sales of cars because of macroeconomic conditions," he said.

Steel is the key material for automobile manufacturing. It takes up about 85 percent of all materials for a heavy-duty vehicle and about 64 percent for a family car.

Therefore, the sales of such steel products are closely related to the automobile market, Zhang said.

Chinese automobile output clocked 40 to 50 percent annual growth in 2009, a boom for both the auto market and related steel producers.

"However, the opportunity has gone and a similar situation will never happen again since China started to control automobile purchases two years ago," said Zhang.

For the first 11 months, China's automobile sales were about 17.5 million units, up only 4 percent year-on-year, according to the China Association of Automobile Manufacturers.

Since late 2010, customers in Beijing have to apply for a government-operated draw for a license plate before purchasing a car. The municipal government allows 20,000 new plates a month, about one out of 70 who apply.

Other big cities such as Shanghai carried out similar policies to reduce carbon emissions and encourage green transportation.

"The economic slowdown and political disputes between China and Japan starting from late September have added to the negative impacts on the market," Zhang said.

He said companies producing steel products for exports are influenced less by domestic factors.

Despite the declining trend this year, analysts said the market for automobile-use steel products still brings higher profits compared with the crude steel refining business, attracting many Chinese producers to join the competition.

"It's proof of the advanced manufacturing technology by producing high-end steel products for automobile use," said Hu Yanping, a steel analyst with Umetal.com. "Plus Baoshan Iron & Steel Co, the country's largest public steel maker, has had a great performance in the sector, which motivates many other major players to copy its strategy."

The company has produced more than 44 million tons of steel sheets for China's automobile manufacturing industry in the past 20 years, according to Umetal.com.

With a current annual output of about 3 million tons of steel sheets for automobile use, Baosteel dominates more than half of the domestic market, according to Hu.

Common-use steel sheet products for electronic appliances cost about 4,400 yuan ($698) a ton, while the ones for automobiles are priced at about 5,300 yuan, she said.

"In fact, the prices of automobile-use steel are not transparent and some special products' prices are even above the average," she added.

"Nevertheless, the net profits of such products will definitely decrease as the domestic production capacities increase and technologies improve."

"Many producers can make steel sheets for automobiles now after they introduced production lines from abroad, which may lead to overcapacity problems," said Zhang of Mysteel.com.

"From the technology perspective, Baosteel, Angang Steel Co and Wuhan Iron and Steel Co are leading players," Hu said.

Facing the promising market of automobile-use steel, Chinese companies started increasing their business in the sector by cooperating with foreign companies.

Following Baosteel, Ansteel was the second domestic company to start large-scale production of car panels when it cooperated with German industrial giant ThyssenKrupp AG in 2002. Their products target high-end car makers such as BMW and Volkswagen.

After developments in the past 10 years, the company will continue to focus on the research and development of steel products for automobile use, which are considered their core products, the company indicated on Dec 7 at a company seminar.

Shougang Group, one of China's top five steel companies, invested 6.4 billion yuan ($103 million) in building a cold-roll steel sheets production line in 2008. The production line has annual capacity of 1.5 million tons, targeting automobile use.

An anonymous officer at Shougang Group said the output of the production line's steel products for automobiles will not decline next year.

Shougang Jingtang United Iron Ore and Steel Co, a subsidiary of Shougang, will produce about 300,000 tons of automobile steel products this year, up 275 percent compared with last year, said Yang Chunzheng, deputy general manager of Shougang Jingtang.

"Because of the economic slowdown, the steel industry is suffering from losses caused by declining prices and overcapacity. Thus, many steel companies are turning to new products to make it through the tough times and the automobile sector is a trend," he said.

"Automobile steel is a growing sector with good profitability."

Shougang Jingtang produced 80,000 tons of automobile steel sheets in 2011, but the figure will grow to about 500,000 tons in 2013, according to Yang.

"Shougang is developing quickly toward high-end steel products, but its annual output of automobile-use steel sheets is not big and does not have a big influence on the market," said Hu. "Its advantage is in the steel market for electronic appliances. The same with Tangshan Iron and Steel Group Co, which is also following a similar path to become high-end and international."

Tangsteel has been trying to expand the overseas market, which is considered a tough path by analysts.

Hu said the export market of China's steel sheets for automobile use is not mature yet. Countries such as South Korea, Japan and Germany intend to use their own steel products.

"But it is always a good trend to explore the markets."

After more than 20 years of development for China's auto industry, it has stepped into a period with a low but stable growth rate. The competition has forced automakers to put more emphasis on cost control rather than pursuing higher quality, which has brought new challenges as well as opportunities to steel sheet makers.

"In the automobile-use steel industry, we should not only provide better quality, service and technology for our customers, but also individualized products to meet their special needs," said Tang Fuping, deputy general manager of Ansteel.

"I don't care too much where the steel from for my car comes from, domestic or overseas, but I do care whether it is light and strong enough," said Zhao Peng, who is planning to buy a car after he qualified last month through a lottery.

"In order to save costs, we are considering using domestic steel sheets to replace the imported products for future production," said a company insider of a large automaker in China.

"We hope that Baosteel can enhance its innovation and research to meet our needs for better quality and lower price," he said.

The strategic change by domestic auto producers is offering opportunities for related steel makers.

Even some foreign auto manufacturers are interested in Baosteel's products, industry experts said.

"It raises the costs and inventory risks to use imported steel sheets for production. That's why we are seeking local suppliers," said a European auto industry insider who declined to be named. "If Baosteel can accelerate high-end product research and development to solve our cost problem, we would love to become their loyal client."

dujuan@chinadaily.com.cn

Workers assemble cars at an automobile factory in Chongqing, Southwest China. Steel is the key raw material for automobile manufacturing and accounts for about 85 percent of all the material in a heavy-duty vehicle and for about 64 percent in a family car. Xu Yongping / For China Daily

(China Daily 12/31/2012 page13)