chen leiming, secretary general china national association of metal material trade new paradigm...

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Chen Leiming, Secretary General

China National Association of Metal Material Trade

New Paradigm & New Pattern —the Changing Steel Circulation Sector in China

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New Paradigm & New Pattern

—the Changing Steel Circulation Sector in China

1.Ten new paradigms for China’s steel circulation sector

2. Ten new patterns for China’s steel circulation sector

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1.Ten new paradigms for China’s steel circulation sector

Against the backdrop of the new normal of “combined three phases” of China economy, steel distribution is faced with unprecedented risk, which forced the sector to reform and change the past practice of “resource as the king and extensive operation”, and set up new practice that is in line with market condition.

1.“trade mode” finished, “service mode” started With the coming IT era, the traditional trade mode of “getting price difference

from buying and selling is finished, the service mode focusing on customer demand is started.

resource is king—→service is king steel company—→production-oriented service provider steel trader—→steel service provide

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2. Steel trader becomes “slim”

reshuffle will continue

Of all the 150,000 steel trader in China, 50% have exited from the market(70% from Shanghai). For the remaining 50%, 20% are shell companies that still wait and see, without carrying out business. Only 30% can maintain the operation level as those before 2010.

That is to say, the steel traders in real sense are down from 150,000 to 80,000. some have retreated or are retreating. The reshuffle will continue, but with slow speed.

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3. Higher concentration, market share is going through re-allocation

Since 2008, in spite of the slow-down of crude steel production growth in China, the output is still on the rise year by year. As so many traders exist the market, the output can be generally digested by the market (export excl.). This means that the open market share is occupied by the surviving traders. It is the expansion opportunity for them.

In 2014, 50 backbone member companies of CAMT have increased their market share by 8.3%, with the highest increase range being 30%.

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4. Industry chain is merging rapidly

Resource integration, industry chain expansion have become the consensus for more and more steel companies.

“company integration”, “uptream-downstream integration” and “cross integration” are accelerating, which will help to integrate multiple resource, reduce total operation cost, enhance productivity efficiency and wade through the difficulty. This has become the key measure for steel and trade company to transform and upgrade themselves.

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5. Trading market function is weakened First, due to the low steel price in the past two years, plus the

tradition trade mode of stockpiling and earning price difference is being phased out. Very few steel traders resort to stockpiling. They follow the principle of longer industry chain, short supply chain. Market stockpile function is no more.

Second, steel traders mostly are short of funding, and are incapable of stockpiling

Third, over half of steel traders in China have existed the market. Most steel trading market is deserted and covered by wild grass.

The once prosperous steel trading market is totally lost and deserted.

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Supply chain financing deal with the financing and guarantee difficulty for upper and downstream companies. As upper and downstream financing bottleneck is resolved, the supply chain financing cost is lowered, and the core competitiveness of company

and its supporting organizations are also enhanced.

6.supply chain financing is the new fashion

Since the bank are afraid of providing loans to steel company, and vicious extracts loan, supply chain financing becomes the new fashion for steel traders. It is recognized and rapidly responded by banks and companies on the steel supply chain.

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7.diversified procurement

（ 1 ） longer-term contracts for steel producers

（ 2 ） market procurement

（ 3 ） online procurement

（ 4 ） centralized procurement

（ 5 ） targeted procurement

The procurement mode is changed, which breaks down the resource monopoly mode in the past. Steel traders can reduce the burden of signing longer-term contracts and pre-payment. They can freely make procurement according to customer needs.

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8. Flat operation mode

（ 1 ） Less tier management for more profit

（ 2 ） Point-to-point direct supply to reduce logistic cost

（ 3 ） Procurement at any time to reduce capital cost

（ 4 ） One-stop service to improve efficiency and service capacity

（ 5 ） All penetrative participation to improve profits at all supply chain nodes.

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9. Profit is king, returning all function back to normal

“profitability” is the principle and value of company. Steel trader shall follow this principle. But at the peak time of steel trade, the normal steel trade was distorted, became financing tool or support tool, the risk is obvious.

In the new market environment, most steel traders are back to normal. They realize their real objective and take effort to make steel trade back to normal track.

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10. Steel online retails is more popular

Steel online retailers has multiple functions, such as information flow, cash flow, receipt flow, logistics and distribution, orders registration, physical supervision, orders financing, credit service. They can achieve electronic trade, online settlement, digital stockpiling. Online retailer is a revolution of traditional steel trader, it is also a big step for steel trading sector.

Currently, there are 170 online retail platforms in China. Steel online retailers are still exploring, with many bottlenecks

to be tackled.

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2. Ten new patterns for China’s steel circulation sector

1.Terminal direct supply and combined service

Whoever control the channel will take all. The terminal is the market, the channel is the lifeline.

Terminal suppliers—→Terminal service provider

Single service—→Combined service

Businessman—→Partner

I make money—→Help you save money

Sell products—→Provide solutions

Concept is changed, idea is transformed, mindset is elevated, mode is innovated.

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2. Steel processing and customized service

（ 1 ） Reduce supply chain cost to improve combined competitiveness

（ 2 ） Closer to customer to meet customized demand

（ 3 ） Solid terminal channel for stable market share

（ 4 ） Promoting R&D to achieve technology progress

More than 200 steel processing center have high professional standards. They are located mostly in developed regions like East China, South China and Central China. Most of them provide service for automobile, household electric appliance, shipbuilding and spare parts.

Steel processing distribution has the following features:

Customer-oriented, network, standardization, IT, integration and market-oriented.

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3. Steel logistic park and centralized service

Large, professional steel logistic park use modern operation mode, it is a multi-functional center combining steel stockpiling, processing and distribution, steel terminal, E-commerce, bonded logistics, transfer and appropriation, product showcase, bank credit and online communication. It achieves centralized service function including integration, standardization, scale development, centralization and IT management.

new bottlenecks for steel logistic park:

（ 1 ） Difficult to attract investment. The park is under market risk. The finished steel logistic park is facing less investment. Companies are unwilling to move in.

（ 2 ） Difficult in financing. First, the bank tighten steel credit; second, no companies means no rolling development. Many new parks are under double pressure.

（ 3 ） Ineffective combined function. Given the impact, many steel logistic parks fail to achieve their matching functions, and can be effectively connected and interact with the whole steel industry.

（ 4 ） Repetitive construction. There is still repetitive construction these parks, which lead to low level competition.

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4 、 Steel online retailer and function integration

There are 170 steel E-trade platforms in China, major steel companies like Baosteel, Shagang Steel, Hegang Steel, Angang Steel, plus trade company, logistic company, stockpile company, information research institutes, such as Minmetal Development, Tianjin Metal, Mysteel have set up their own platforms and adopt B2B (business to business), B2C (business to customer) and C2C (customer to customer).

Since 2014, steel online retailers embrace rapid growth. Steel E-commerce enjoy prosperity. But there is still very few successful steel E-commerce platforms, mostly are under exploration.

Online retail platform is an improvement and revolution for the steel industry, but it can’t replace other modes.

The public is looking forward to the future

of steel online retailing.

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5. Steel futures and risk avoidance

Main function of steel futures: （ 1 ） Risk avoidance, profit gaining, futures & commodity

combination, hedging, risk avoidance, no loss means profits （ 2 ） Price discovery, production guidance. Steel futures and

commodity price are highly relevant. Since futures price reflects the basics and psychological expectation, the price is accepted by steel producer, steel trader and investor.

（ 3 ） Expand the channel and lock in on the cost. Steel futures is a new channel. It provides transparent coordinates for commodity price setting, and it highly relevant. It reduces the information asymmetry in the market. Especially for steel producers, it helps to lock in on production cost based on futures expectation.

China’s steel producer, traders and consumer pay increasing attention

to steel futures. Its impact on the industry is taking effect.

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6. Producer cooperation and industry synergy

Producer advantage ←→ Trader disadvantage Trader advantage ←→Producer disadvantage ☆ Scale Understanding and control of regional market☆ ☆ Resource Combined function and multi-brand operation☆ ☆ Capital Detail service——last mile☆ ☆ Brand Market flexibility ☆ ☆ Channel （ large terminal ） ☆ Market segmentation ☆ Talents Interpersonal relation and cast couch in regional market☆ ☆ Technology Capital pre-payment☆ Steel producer and trader shall be complementary to each other, seek common growth,

beneficial to each other and achieve win-win. They are brothers.

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New pattern of cooperation （ 1 ） New agent The core of new agent mode is that steel trader will sell the producer’s product, but

the latter not just gets money, it works with the former to implement common sales strategy, common price and face market change commonly. The trader help the producer to finish certain amount of sale and get its profit as promised in the contract. This ensure that the producer will foster common profit group and live together to seek common development in the market. 98% agreed to this practice during an survey by Cngold.

（ 2 ） Commission arrangement Commission arrangement is that the trader finish certain amount of sales based

on the regional market price set by the producer, then the producer will offer certain commission to the trader according to the tons sold. Commission arrangement requires the trader’s pre-payment and certain loans. 95% agreed to this practice during an survey by Cngold.

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（ 3 ） Consignment sale Trader with stockpile can move the stockpile to the front, and sell the

steel product while providing warehousing for the producer. The producer can settle the price based on market condition, and offer the trader certain amount of commission according to the tons sold. The difference between this mode with that of commission is that the steel trader doesn’t need to make pre-payment.

（ 4 ） Joint venture Steel producer and trader make joint investment, and use the

former’s resource and latter’s channel to set up a new joint venture, such as steel logistics, steel trade, E-commerce and others, so as to control the market in certain regions. Currently, there are several successful cases.

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（ 5 ） Project cooperation Producers carry out short-term cooperation on a large engineering project.

（ 6 ） Industry chain cooperation Currently, some steel producers and traders are carrying out all-round

cooperation across the industry chain, such as iron ore, coke and other raw material supply, product pre-order and exclusive sale channel development, and matching service for the producers.

The future of cooperation is bright, and the mode is diversified. As long as both parties are sincere, frank and follow the principle of common profit and win-win, they will blaze new trails of cooperation, and will surely promote China’s steel industry to break out of the dilemma and successfully transform themselves.

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7 、 Working together and self-salvation

working together ：（ 1 ） Rely on industry organization, and physical

project (such as logistic park or online retailer platform) to set up stock company

（ 2 ） Steel trader works with producer

（ 3 ） Work with upper and downstream user

（ 4 ） Work together against bank’s credit crunch

（ 5 ） Rely on sector association for joint protection

（ 6 ） Work together psychologically, encourage and support each other to wade through difficulty

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8. M&A, re-organization and mixed economy regime

The 3rd plenary session of the 18th CPC meeting noted that, mixed ownership economy where state capital, collective capital, non-public capital hold the others’ stocks and merge with each other, are the important approach to the basic economic regime, mixed ownership economy shall be encouraged actively.

First, it helps to deal with the development difficulties constraining the SOEs for long time, and accelerate SOEs to compete in the market. Firstly, it helps to deal with the liquidity issue that has been in place for long time for state assets; Secondly, it helps to deal with the incomplete legal person governance structure in SOEs; thirdly, it helps to cope with the low efficiency of SOEs.

Second, it helps to facilitate all ownerships to learn from each other and seek common development.

Third, it helps to magnify the state capital, achieve value appreciation, and enhance competitiveness and influence.

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9. Close industry chain embed with finance mode Large steel traders rely their strong capital, famous

brand, excellent talents, advanced management and concept to further and control the complete industry chain of the sector. They adopt close, circular and multi-point operation, and also embed financial service, so as to ensure that they can control the whole industry chain and achieve profit maximization.

Currently, steel traders with annual output over 100 million tons include: Minmetal Development Holding Co., Ltd., Tianjin Commodity Intl Metal Co., Ltd., Zhejiang Commodity Metal Co., Ltd, China Railway Commodity Holding Co., Ltd, Guangdong Commodity Group Metal Material Co., Ltd..

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10. Professional operation and detail service

Currently, many steel traders use their own terminal user as an advantage, and focus on special steel product. They combine advantage resource to carry out professional operation, differentiated operation and further explore in the sector. They foster their own feature and advantage to provide customers with specific and professional service, thus becoming the leaders in the sector. Such profound and specific practice has become the key to the survival of many steel traders.

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Conclusion: Industry risk also comes with opportunity

Against all odds, whoever make changes will survive

The weaker will be deleted, the stronger will stay

Back to normal and embrace the coming spring!

As long as we understand the situation and identity the gap, we can build up confidence and hone our skills and seek transformative development and operation mode. We can surely rebound and head towards brighter future!

Thank you!

chen leiming, secretary general china national association of metal material trade new paradigm...

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