Steelmakers eye non-steel businesses amid profit crunch

It might sound ridiculous for a steelmaker to raise pigs, but Chinese steelmaking firms are showing unprecedented interest in non-steel businesses to cope with the challenge of low profits amid a downturn.

Non-steel business turnover of China's seven largest steelmakers with annual capacity of over 20 million tons accounted for 23 percent of the companies' total revenues in the first half of the year. The figure was revealed at a conference on non-steel businesses of the Chinese iron and steel industry, held in Beijing at the end of August.

"Chinese steelmakers have been forced to upgrade their businesses and extend their portfolios at a time when the industry features high capacity and cost but low price and efficiency, while the environmental protection requirement upon them is getting tougher," Zhang Changfu, deputy director of the China Iron and Steel Association, told the conference.

CISA figures showed that combined sales revenue of 86 member enterprises of the association totalled 1.8 trillion yuan ($290 billion) in the first half of the year, up only 0.94 percent from the same period in 2012. The companies' gains totalled 2.27 billion yuan, with a profit margin of 0.13 percent.

In 2012, the profit margin of China's large- and medium-sized iron and steel enterprises stood at 0.04 percent. This is in sharp contrast with the average profit margin of 3.5 percent to 6 percent registered in the non-steel sector.

Zhang said it is a strategy for steelmakers to develop non-steel businesses, centering on their core businesses, to realize moderate diversification.

Over the past decade, Chinese steelmakers have invested 70 billion yuan in non-steel businesses that range from high-technologies, steel structure engineering, emission resources utilization to real estate, according to Xu Jiayan, deputy director of CISA's diversification committee. Xu is also deputy general manager of Benxi Steel Group Corp.

Many of China's leading steelmakers have included non-steel businesses in their overall development plans.

By 2015, Baosteel Group Corp. plans to realize sales revenue of 440 billion yuan, of which 200 billion will be generated from non-steel businesses.

Wuhan Iron and Steel Corp. aims to net 110 billion yuan from non-steel businesses by 2015, accounting for more than 30 percent of the company's total revenue.

In March 2012, the firm announced that it would invest over 30 billion yuan in non-steel businesses that includes green farming like pig-raising.

Industry insiders pointed out that although non-steel businesses have contributed significantly to sales revenues and profits of steelmakers, such businesses are less contributive in building the steelmakers' value chains and consolidating these enterprises' dominance in upstream and downstream industries.

The non-steel businesses remain relatively poor in overall profitability and excessively dependent on core businesses, said Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute.

Meanwhile, the lack of technology and market competitiveness of non-steel businesses also impede their long-term development, Li added.