China’s Steely Risk-Taker Bets on the UK
WHY YOU SHOULD CARE
Because this steel magnate is known for bold bets.
By Christian Shepherd
When Li Ganpo, chairman of Chinese conglomerate Jingye Group, tried to resign from the Chinese Communist Party to start a business in 1985, his boss said no.
“The whole county was in uproar; they said I had an exaggerated sense of my own abilities,” Li said in an interview published on Jingye’s website in January.
His decision to leave the “iron rice bowl” of an official position to become an entrepreneur — finally approved in 1988 — was the first in a series of often high-risk choices, culminating in Jingye’s announcement last week that it had agreed to a deal to rescue British Steel, the United Kingdom’s second-largest steelmaker.
Strategically the acquisition is a bit unusual.
Tomas Gutierrez, Asia editor, Kallanish
Li founded Jingye in 1994, going into steelmaking at just the right time to catch China’s property and infrastructure boom. He previously ran a small tin factory that produced salicylic acid, a chemical used in aspirin and to treat skin conditions.
Jingye has since expanded to include businesses in hotels, chemicals, tourism and property and is headquartered in Li’s hometown of Pingshan, a district of Shijiazhuang, Hebei, China’s top steelmaking province. He still owns 89 percent of the company, according to corporate documents.
The Chinese conglomerate produced about 11 million tons of crude steel in 2018, up 8.3 percent, which compared with just over 7 million tons by the U.K. as a whole. It reported revenue of 90 billion yuan ($13 billion) and profit of 7.4 billion yuan for last year.
Jingye’s move to buy British Steel marks a significant departure from its current operations, which are based almost entirely in Hebei.
“[Jingye’s] reputation is as a deal-driven, profit-driven private steelmaker and an aggressive exporter,” says Tomas Gutierrez, Asia editor at steel media organization Kallanish. “But they don’t have a strong export presence in Europe. Strategically the acquisition is a bit unusual.”
The purchase comes as the Chinese government continues a multiyear campaign to tackle excess steelmaking capacity in part by pressing companies to move production from the industrial heartlands, which has made companies such as Jingye increasingly turn to international markets.
“They have made no secret about looking overseas. It’s been part of their strategy for some time,” says John Johnson, China CEO of commodity consultants CRU. “Hebei province has a clampdown in terms of capacity, and they operate relatively small blast furnaces, meaning they are exposed to closure or at minimum cannot expand in Hebei.”
U.K. steel industry insiders and unions have raised doubts about Jingye’s ability to turn British Steel around after so many others have failed, given the high costs of labor and power in the U.K., as well as weak European demand.
But as a sizable family-owned enterprise with experience in steelmaking, Jingye may in fact be a good match for British Steel, says Johnson. “Hebei is the equivalent of Scunthorpe or South Wales in China. They may be better-suited than an investment company that knows less about the industry.”
Jingye has pledged to invest 1.2 billion pounds in the struggling British steelmaker and said in a presentation to the company seen by the Financial Times that it hoped to cut costs and ramp up production.
But casting a pall over the deal is 2015’s global market rout when massive oversupply in China led its steelmakers to export huge volumes of cheap products to international markets, tanking prices.
The dumping sparked the collapse of Thai-owned Sahaviriya Steel Industries in 2011, after it purchased Redcar Steelworks in Teesdale, England. It forced steelwork closures in Hebei too.
To bring the industry back, the Chinese government withdrew 115 million tons of capacity between 2016 and 2017 and incentivized steelmakers to replace old production in industrial regions with plants elsewhere in China or overseas.
In part as a result of restricted supply from these policies, 2018 was a bumper year for China’s largest steelmakers, with profits and production soaring on the back of a buoyant property market. But fears of oversupply in the Chinese steel market have risen sharply in recent months as demand outlook has weakened.
Li told an industry conference in March that Chinese steelmakers were struggling to find international demand. “The companies we have invested in already have enough [steel] to use, we can’t export,” he said.
Tapping foreign markets has become increasingly attractive to Chinese steelmakers in recent years, both via building new capacity in southeast Asia and high-profile acquisitions.
Much of this has been done with direct encouragement from the government. Hebei last year released a plan encouraging steelmakers to invest overseas, aiming for companies to have invested $5 billion in 12 million tons of overseas capacity by 2020.
“There’s a clear push in Hebei to move capacity at least out of the province and potentially out of the country,” says Gutierrez.
In his presentation to British Steel, Li cast the acquisition as a natural next step in Jingye’s growth.
“To go from not having a single penny to having a steel company with an annual capacity of 15 million tons, then to come across an excellent asset like British Steel, how could we not try our best to grow the company to the next level?” he said, according to the slides seen by the FT.
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