Friday 16 January 2009
Shagang Chairman Shen Wenrong Iinsists on Expanding and Going Public as Prices Fall
A current winter chill for the global steel industry is not as cold for Shen Wenrong, chairman of Jiangsu Shagang Group, China’s largest private steelmaker. While other steel companies are downsizing, Shen leads a company that’s actively exploring the capital and raw material markets, and planning further expansions based on low-cost advantages.
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Shagang Chairman Shen Wenrong Iinsists on Expanding and Going Public as Prices Fall
Gong Jing, Caijing
12 January 2009
A current winter chill for the global steel industry is not as cold for Shen Wenrong, chairman of Jiangsu Shagang Group, China’s largest private steelmaker. While other steel companies are downsizing, Shen leads a company that’s actively exploring the capital and raw material markets, and planning further expansions based on low-cost advantages.
Shagang and copper-tube maker Gaoxin Zhangtong Co. (SZSE: 002075) announced December 19 a decision to merge Zhangtong with the steelmaker’s subsidiaries Huaigang Special Steel and Anyang Yongxing as a first step toward a long-awaited stock market listing.
Shagang has spent the past decade unsuccessfully trying to access capital markets through an IPO or by acquiring listed companies. Goldman Sachs planned to buy a 10 percent stake in Shagang with 6.6 billion yuan in October 2007, with the goal of helping the steelmaker launch an overseas IPO. But the deal fell through because it lacked regulatory approval, and because of the ensuing global financial crisis. Still, Shagang did not give up. Its agreement with Zhangtong may open a new door.
Shagang is also taking advantage of low commodity prices of iron ore. Caijing learned that Shagang recently acquired an Australian company with iron ore reserves of 800 million tons. The move increased Shagang’s annual ore supply to 13 million tons, equal to 50 percent of its current demand, and gave it the largest overseas ore supply of any private Chinese steelmaker.
Shagang plans to operate at full capacity in 2009, said Shen, even though he expects the current crisis in the steel industry to last at least a year and maybe longer. He was interviewed by Caijing December 27.
Caijing: Shagang has always wanted to enter the capital markets, and now you have Zhangtong. How will you go public?
Shen Wenrong: It depends on the policy direction and guidance of the relevant ministries and government departments. Shagang will take the easiest way, whatever that is. We are making progress, but we’re not ready for a public announcement yet. There are supporters as well as opponents of this debt restructuring (of Zhangtong), so I’d rather not give any more comments. However, creditor banks of Zhangtong as well as its shareholders have warmly welcomed Shagang, and its stock price climbed to the daily limit for several days.
Caijing: Will Shagang gradually go public with the shell of Zhangtong, or launch an overseas listing after introducing strategic investors, as you’ve planned?
Shen Wenrong: You’re right; those are the two possible ways. But we cannot tell which way we will take for the time being.
Caijing: Do you still hold to your previous opinion on issues such as corporate equity and the introduction of strategic investors? That’s to say, as long as it’s good for the company, is it okay for others, such as the rumoured Baosteel, to be a large shareholder.
Shen Wenrong: Yes, I still adhere to this view. I don’t mind who gets the right to exercise control, as long as it is for the good of the company.
Caijing: Have you changed your mind about listing the company?
Shen Wenrong: Shagang is by no means reluctant to list as long as there are proper conditions. The way is not smooth for Shagang to go public, so we are not very anxious now. But when conditions are ripe and success is assured, Shagang will take the opportunity.
Zhangtong is a listed company, and we may form a new listed company. Shagang will not go down a road with a dead end, but will move ahead if the path leads to somewhere.
Caijing: Shangang needs 25 million tons of overseas iron ore every year. You once said the company’s amount of self-supplied iron ore would reach 50 percent, but the two mines that Shangang now owns overseas can only supply 4.5 million tons. It seems you still need other iron ore supplies with an annual production of 8 or 9 million tons.
Shen Wenrong: I haven’t disclosed this to the public. I bought an Australian listed company a month ago, and the main asset of the company is a mine with reserves of about 800 million tons. The mine is expected to produce 6.8 million tons of high quality iron ore per year after the operation starts. What’s more, the two projects you mentioned just now have an annual production of 7 million tons, not 4.5 million.
Caijing: How was this acquisition completed, and at what price?
Shen Wenrong: There were reports about Shagang’s acquisition of an ABM project in the second half of 2007. Shagang used capital from the ABM acquisition to buy a local listed company and its mining rights. So Shagang didn’t pay an extra penny. This deal can now be made public because the relevant approval procedures are basically through now.
Caijing: We are eager to know more about the mine. Can you share more details?
Shen Wenrong: The mine is still undeveloped, so the price was not very high. However, it will cost about US$ 800 million to US$ 1 billion to launch the operation. Due to declining steel demand and the cost, we have no plans to exploit the mine immediately but will wait for a better time. Shagang is the only Chinese enterprise with mine reserves of more than 1 billion tons.
Caijing: Shagang participated in the bidding of the Namisa iron ore mine in Brazil this October and made it to the second round. Why do you give up?
Shen Wenrong: The 40 percent stake cost more than US$ 3.2 billion in the final transaction. We think the price was far more than it’s worth.
Caijing: What are your predictions about the steel industry for the years to come?
Shen Wenrong: Iron ore prices will certainly fall in 2009, at least 40 to 50 percent. The three major iron ore companies will lose the Chinese market if prices do not drop that much. In fact, there is no shortage of iron ore, since China can import iron ore from countries such as Russia, India and Peru. If the three major companies only cut 20 to 30 percent from their prices, a large number of Chinese companies will turn to other companies or even overseas for iron ore supplies. That’s by no means what the three companies would like to see.
Caijing: How about the price of iron and steel? How long will it remain low?
Shen Wenrong: The current price of iron and steel will remain low for more than a half year, a year, or even longer. There is a possibility that prices will go down further. China now has an iron and steel production capacity of 500 million tons, and the figure may be around 400 million in 2009, with actual demand of 200 million. When there is oversupply, profit margins will decrease further.
Caijing: In this case, what will Shagang do in 2009?
Shen Wenrong: We will increase efficiency and adjust our production to meet the needs of the market.
National steel production may decline 30 percent in 2009. But Shagang has decided to continue full production. We do not plan to increase production, but to ensure sufficient capacity. We expect less profit but a larger market share next year.
It is a fact that the overall situation is not very encouraging, but there is no oversupply for Shagang since we are still able to sell all our products. The gloomy market is a good opportunity for Shagang to seize a bigger market share.
Caijing: Will there be liquidity problems for Shagang, given its planned full production and discouraging market situation?
Shen Wenrong: There will be absolutely no problem with that. We have long been ready. What’s more, we are planning more M&As and other activity in 2009.
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