The road to recovery in the steel industry is still far from being possible?

Abstract The steel industry is only entering the 'deep autumn' season, and the real 'winter' has not yet arrived. The era of severe overcapacity in China's steel industry is expected to come during the '13th Five-Year Plan' period. Xu Lejiang, chairman of Baosteel Group Co., Ltd. said.
The steel industry is currently only entering the 'deep autumn' season, and the real 'winter' has not yet arrived. The era of severe overcapacity in China's steel industry is expected to come during the '13th Five-Year Plan' period. Xu Lejiang, chairman of Baosteel Group Co., Ltd. said.

This sounds inevitably a bit heavy. The current four words "steel winter" are frequently reported in the newspapers and widely discussed by experts and scholars in the industry. However, in the eyes of Xu Lejiang, the so-called "cold winter" has been replaced by "deep autumn", which means that the steel industry is recovering. Still far from being possible.

The sales profit rate is only 0.13%, and it continues to bottom out in the industrial enterprises above designated size in China. The loss is as high as 40.7% – this is the “deep autumn” transcript handed over by the steel industry in the first half of the year. It is conceivable that if the "cold winter" is reached, the answer to the steel industry will pass.

"We should see that there is still no period of the industry's lowest fascination. Due to the oversupply of the industry, the high level of raw materials, the participation of financial capital in the value distribution of the steel industry, etc., the steel industry will be in a long period of time. In the state of meager profit, there will even be annual losses.” Xu Lejiang sounded the alarm for the steel industry.

When the "one pound of steel lost to a cabbage" tempered into "ton steel profit is not enough to buy half a popsicle". Living first, there is only a little hope for steel companies.

"Currently, the government is expected to introduce economic stimulus policies. There is almost no possibility to pull steel. Enterprises can only save themselves." Xu Lejiang said with affirmation that the most effective self-help in the short term is to strengthen industry self-discipline and control production.

However, it should be emphasized that the control of production is not limited to production. It is required that enterprises insist on no contract and no production, no money, no delivery, and no production cost. This may be one of the few ways that Xu Lejiang can solve the problem of overcapacity after he has been seriously ill in the steel industry.

Where is the overcapacity?

“Overcapacity is a common problem faced by Chinese manufacturing industries, including steel. The steel industry is particularly typical and is considered to be the chief culprit in the current industry.” Xu Lejiang admits that China’s steel overcapacity has its special reasons.

The impulse to expand capacity under the GDP performance view is the most typical. Because the characteristics of the steel industry determine the contribution of the industry to local GDP is high, leading to the participation of steel in the pillar industries.

In general, steel companies are the largest industrial enterprises in the region, which not only contributes to the huge local GDP, but also contributes a large amount of tax revenue, and can also solve employment pressure. Therefore, all localities have a strong desire to become bigger and stronger in the steel industry.

“Shizuishan City, Ningxia Hui Autonomous Region has added 3 million tons of new steel production capacity.” In the eyes of Xu Lejiang, this may be just the tip of the iceberg, a new steel project, investment is GDP, production or GDP, as far as winning is not profitable, it is the enterprise’s own The government does not need to worry too much about it.

In addition to the government, the company itself is hard to escape. One-sided pursuit of scale competition has led to an increasing number of steel companies.

Due to the lack of market-based mergers and acquisitions in China's steel companies, many small-scale steel companies resisted mergers and acquisitions and sought to grow themselves. Therefore, the birth of China's large steel mills relied not on the absorption of the country's memory capacity, but mainly on the absorption. The increase in production capacity has resulted in the rapid expansion of China's steel production capacity with the scale of Chinese steel companies.

But this set of roads is no longer working. “In the past, steel companies expanded their production and made money when they produced them. But today, the pursuit of scale effect is to find death.” Xu Lejiang said bluntly.

At the same time, China's indirect financing system has also led small and medium-sized steel companies to “slap the ground” and expand their production capacity.

The larger the scale of the enterprise, the stronger the financing ability of the enterprise under the indirect financing system dominated by large and medium-sized banks, the more invincible it can be in the overall competition. Therefore, for small and medium-sized steel companies, expanding the scale is a helpless means of survival. This is one reason why a large number of small and medium-sized private steel companies have grown rapidly in recent years.

In Xu Lejiang's view, there are many ways for the “diversified” development of iron and steel enterprises. Some steel companies that are “not doing business” use large funds to finance. If the steel situation is good, continue to invest money. If it is not good, then switch to a more profitable real estate and coal.
According to the statistics of the National Bureau of Statistics, from 2006 to 2012, the cumulative reduction of crude steel capacity in China was 76 million tons. However, the cumulative domestic crude steel production capacity reached 440 million tons. In 2012, the “weird circle” of production capacity that was more and more eliminated, and the steel industry also handed over a answer sheet with a capacity utilization rate of only 74.9%.

The worst time has not yet arrived

In the 13 years from 2000 to 2012, China's steel capacity utilization rate was basically above 80% before 2006. After 2006, the capacity utilization rate fell below 80%, but basically maintained in the range of 75% to 80%. .

Although there is a positive positive relationship between changes in industry profitability and capacity utilization, it is not a very strict correspondence. So can we say that there has been a problem of overcapacity in China's steel industry since 2000?

Xu Lejiang believes that these 10 years have happened to be the fastest period for the development of China's steel industry. There is no country in the world where the steel industry will develop rapidly under the condition of overcapacity, which obviously does not meet the basic laws of industrial development.

According to the characteristics of different industries and the level of industrial production organization, each country determines different “capacity utilization ratios”. Taking steel as an example, Europe is 75% and Japan is 78%.

“China’s steel industry is huge in scale and has a large room for manoeuvre. The capacity utilization rate of 80% should be fully utilized.” Xu Lejiang divides overcapacity into three stages through capacity utilization: between 75% and 80%. Capacity utilization is a slight overcapacity, with moderate overcapacity between 70% and 75%, and severe overcapacity below 70%.

If this is the standard, then there will be no overcapacity of steel before 2006. Since 2006, it has only been a slight overcapacity.

For the future trend of steel production capacity, Xu Lejiang gave his own prediction: Europe, the United States and other developed countries have such an extreme period of less than 60% utilization rate of steel capacity, which is generally the turning point in domestic steel demand growth. After that, the steel output peaked. However, although China's current steel demand has dropped significantly, it has not yet experienced negative growth, and the peak production has not yet arrived. However, he estimates that the inflection point and peak are not far away and are expected to arrive during the "13th Five-Year Plan" period.

"In the face of the difficult period that is coming, I would like to advise all industry colleagues to make the worst plans, to have administrative control failures, and to prepare for the industry's capacity utilization rate below 60%." Xu Lejiang believes that since the car is placed there, we There is no reason to be indifferent. From now on, we must plan ahead to avoid such extreme and serious excesses.

But everything has two sides. Overcapacity is also a standard for testing the industry to become immature. After maturity, overcapacity will exist for a long time, and may lead to a period of decline in the industry, but moderate overcapacity is conducive to full competition in the industry. In this regard, we must have a full understanding and we must treat the problem of overcapacity in a dialectical manner.

What is the solution to overcapacity?

"Overcapacity is an industry problem, and the strength of a single enterprise cannot be resolved. The excessive growth of China's steel production capacity has considerable administrative factors mixed into it. Therefore, the de-capacity of China's steel industry must abandon administrative means to market. Turning into the principle." Using market-based means to treat overcapacity is probably the last straw in the eyes of Xu Lejiang to save the steel industry.

The cancellation and decentralization of a number of examination and approval powers by the State Council has released a positive signal, and the administrative approval limit for liberalizing the steel industry is likely to become an effective part of resolving overcapacity.

"Some people will say that since the production capacity is already overcapitated, the administrative approval limit for the industry access will not open up more capital into the steel industry? Is this really true?" Xu Lejiang believes that capital is rational, industry access Restrictions have caused artificial "scarcity" illusions, a large number of private capital will reverse thinking, and will enter the industry in violation of any means. In reality, power rent-seeking and slow inefficiency in administrative examination and approval greatly reduce the entry of compliance capital. The efficiency of the steel industry. Therefore, once the industry access restrictions are liberalized, investors will be more cautious and the efficiency of capital will be greatly improved.

However, allowing capital to enter the steel industry freely does not mean that there is no entry step. The government's responsibility is to establish strict "rules of the game" and act according to the rules. For example, for new enterprises, there must be strict standards for energy consumption, emissions, quality, etc., and the period for which the stock capacity must be reformed in a limited period to meet the new standards.

At the same time, the free entry of capital must have the free exit of capital to correspond to it. To solve the problem of overcapacity, it also needs a trading platform and mechanism for the free exit of industrial capital. Xu Lejiang said that at present, China's steel industry has half of the state-owned capital, while state-owned steel companies are mostly giants. The capital is poorly liquid and there are many policy restrictions. Therefore, it is urgent to establish a third-party platform suitable for block trades. Trading facilitates the withdrawal of steel capital from the steel industry.

In addition, market-based reductions in mergers and acquisitions may also be a boost to overcapacity. "Our traditional mergers and acquisitions are aimed at achieving the effect of 1+1>2 on the scale. But now the mergers and acquisitions in the steel industry are mostly achieved under the leadership of the executive, and mainly in the reorganization of the close relatives of the administrative region. ”

In Xu Lejiang's view, the vast majority of such mergers and acquisitions are incremental restructuring, seeking further expansion of scale, even if some of the backward production capacity is eliminated during the restructuring process will be covered by more new capacity.


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