Logistics park to help reduce costs, industry integration

The steel industry in China is in deep water and Shen Wenrong knows it only too well. Shen, vice-chairman of the China Iron and Steel Association, says the industry has entered one of the most difficult times in its history, "the toughest period for us since we were founded in 1975".

But Shen is also chairman of China's largest private steelmaker, Jiangsu Shagang Group, which is pushing ahead with construction of a steel logistics park in Zhangjiagang that will be critical in helping reduce transport costs and integrating steel-related industries.

"Because the domestic steel market is struggling now, it is crucial that we push ahead with these changes," Shen says.

"The park represents another transformation process for our group and is a milestone in the domestic steel logistics industry."

Apart from being the largest private company in the country by sales, Shagang is 346th on the Fortune Global 500 list.

The 30 billion yuan ($4.79 billion; 3.71 billion euros) investment in Jiulong Steel Logistics Park, a key part of the group's 2010-20 development plan, will take place in two stages.

The first stage of the park, started at the beginning of last year and due to be finished by 2015, focuses on building the logistics services facilities for steel end products, including an inventory center, a cutting and pre-processing center and a distribution center.

The second stage, work on which is expected to start next year and be finished by 2017, will be mainly for raw materials, says Zhang Li, general manager of Jiulong Steel Logistics Co Ltd, who is also responsible for developing the park.

"In the past 30 years, stimulated by the fast development of China's economy and huge infrastructure and property investment, China's steel industry has grown rapidly, but this has had a drawback: severe overcapacity," Shen says.

The China Iron and Steel Association says that of 81 steel-makers it tracks, 38 recorded losses in the first seven months of this year. These totaled 16.9 billion yuan compared with 400 million yuan in the corresponding period last year.

China's crude steel output was a little less than 684 million metric tons last year, compared with about 500 million metric tons in 2008, according to Lange Steel Information Research Center, an industrial consultancy in Beijing.

Because of the fast growth of the industry, the ability of steel logistics companies to provide services lags far behind what is required to meet the demands of the domestic steel industry, says Guo Yi, a steel industry analyst with Industrial Securities based in Fujian province.

"China's steel logistics industry has many problems, in terms of high operating costs and a scattered market," he says.

Compared with countries such as Germany, logistics costs in China are about 400 yuan higher per ton and are a huge burden on domestic steelmakers, Zhang says.

Moreover, as more companies move up the value chain, there will be a growing need for increasingly efficient and sophisticated logistics delivery services, requiring time-definite transport and later cut-off times, Zhang says.

"The establishment of the steel logistics park is of great significance for the domestic steel logistics industry as a whole, since it provides all-round services for it, including processing, transport, storage and trade. It will be the first steel logistics park of its kind in the country," he says.

According to Shen, Jiulong Steel Logistics Park offers many benefits.

"It is located in East China, which accounts for about 35 percent of China's total steel production and is in huge need of better developed steel logistics. As the park is affiliated to Shagang group, the company will have a strong foothold for its steel logistics business," he says.

Many small and medium-sized enterprises make steel products in the neighboring regions, "offering a great competitive edge for the development of our steel logistics industry," he adds.

Last year the group's revenue was 207.5 billion yuan, 16 percent more than in 2010.

Since work on the steel logistics park began in 2010, business there has grown rapidly. Last year companies in the park brought in revenue of 30 billion yuan, a figure expected to reach 40 billion yuan this year, Zhang says.

Companies in the park are expected to reach sales of 250 billion yuan in five to eight years, making it roughly the size of another Shagang group, Shen says.

The park plans to draw in more investment, both domestic and foreign, Zhang says.

"So far we have attracted 800 logistics-industry related companies," he says.

The park's management is now discussing with a company from South Korea about how to establish a production plant, Zhang says.

The park also aims to provide more high-end services to help steelmakers increase trade, besides providing logistics services, he says.

For example, some faulty products, previously regarded as waste, can be reprocessed and used to make other products, thus reducing costs, says Zhang.

Under the pressure of fast-developing infrastructure in the past, China mainly produced primary and low-end steel products, according to Zhang. A special area to produce high-end steel products has been set up in the park to meet that demand, he says.

In addition, Jiulong Steel Logistics Park will develop an e-commerce platform.

"E-commerce is one of the major trends in futures trading and could add a huge boost to our steel trade. For example, there used to be perhaps just 50 clients who talked about the price of steel. Now, with online trading, an increasing number of traders can join the pricing process and the final price can be more objective."

But the park's development also faces many challenges, analysts say.

"Because China is the largest steel producer, there is no experience from developed countries that can be drawn on," says Liu Zheng, an analyst with Citic Securities of Beijing. "You can't find a steel logistics park this big anywhere else."

Other steel logistics bases, such as the Baosteel center in Shanghai, will pose stiff competition, yet Zhang believes it may also present opportunities.

"As Shanghai transforms itself into an international economic and financial center, it is very likely that some of its steel storage and processing businesses will be outsourced because of the shortage of land. This offers some opportunities," he says.

As the park expands, another big challenge for it will be finding suitable talent, Zhang says. "To finish such a huge construction project, finding talented individuals is crucial. At the moment talent is mainly drawn from Shagang group," he says.

Zhang, 35, is himself a member of the talent pool. After graduating from Suzhou University majoring in finance in 2004, Shagang group sent him to Britain to study international trade.

Besides training talent from within the company, the park has also formed a partnership with local universities and institutions to find more suitable people, Zhang says.

The park is also considering mergers and acquisitions of some neighboring logistics zones to further consolidate the market, according to Zhang.

"After the logistics park is completed, there is no doubt that the nation's steel market will have reached a new high," he says.

huhaiyan@chinadaily.com.cn

(China Daily 10/19/2012 page15)