China Iron and Steel Sector 2019 Q1

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CHINA IRON AND STEEL SECTOR 2019 Q1

An EMIS Insights Industry Report

AD Antidumping Duty

CISA China Iron and Steel Association

CSPI China Steel Price Index

GAC General Administration of Customs

MEE Ministry of Ecology and Environment

MEP Ministry of Environmental Protection

MIIT Ministry of Industry and Information Technology

MOF Ministry of Finance

MOFCOM Ministry of Commerce

MPI China Metallurgical Industry Planning and Research Institute

NBS National Bureau of Statistics

NDRC National Development and Reform Commission

Any redistribution of this information is strictly prohibited. Copyright © 2019 EMIS, all rights reserved. CONTENTS 06STEE Iron Steel & Plan 2016 Government REGULATORY 05 ENVIRONMENT Shanxi Maanshan Iron Hunan Hbis Baoshan Iron 04 CompaniesTop Main Highlights COMPETITIVE 03 LANDSCAPE M& Deals M&A Top Main Sector Indicators Sector Highlights Sector Outlook Quarterly Summary China Iron Steel & 2018 Q4 Update Quarterly SECTOR02 IN FOCUS Restraining Driving Forces Sector Sector Overview Sector in Numbers 01EXECUTIVE Subsector Statistics Main Events Highlights Focus A COMPANIES IN FOCUS IN COMPANIES Co Ltd Co Players Activity, Q1 2018 Q1 Activity, Point Valin Steel Snapshot Taigang Forces L PRODUCTION L - Policy and and Steel Products Output by Region and and Stainless Steel Ltd Co Steel Ltd Co Co Steel Ltd Co Ltd SUMMARY – – 2020 Q1 2019 Q1 p.46 p.42 p.26 p.2 p.1 p. 4 1 1 CHINA IRON AND STEEL SECTOR 2019 Q1 An EMIS Insights Industry Report CONTENTS

01 EXECUTIVE SUMMARY

Sector in Numbers

1,106mn 928mn 771mn tonnes tonnes tonnes Steel Products Crude Steel Pig Iron Output Production Production

1,090mn 140mn 53mn tonnes tonnes tonnes Steel Product Crude Steel Pig Iron Sales Sales Sales

69.5mn 13.2mn 96 tonnes tonnes Large & Medium Enterprises Steel Product Steel Product Exports Imports

Note: Data for 2018. Source: CISA, CEIC, NBS, World Steel Association

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Sector Overview

China is the world’s largest producer of steel, accounting for 51% of the global steel production in 2018, according to the World Steel Association. The data from China Iron and Steel Association (CISA) shows that in 2018, China produced more than 1,106mn tonnes of steel products and 928mn tonnes of crude steel. The bulk of the sector’s output is sold on the domestic market with only 6.3% of the steel output exported in 2018. However, the scale of production in the sector made China a leading steel exporting country, with the volume of Chinese steel exports more than twice as large as that of India, the world’s second-largest exporter.

Entry Modes China’s largest iron and steel companies are controlled by the state. There are foreign players that operate on the market by forming joint ventures with local companies. Until March 2015, foreign participation in the sector was limited to 50% of equity. Currently several large international steel companies have subsidiaries in China, among them Arcelor Mittal, POSCO, Nippon Steel and ThyssenKrupp. Driven by the government efforts to foster consolidation and competiveness in the sector, the M&A activity recorded a substantial increase in the last three years. To comply with the government’s restrictions on new capacity, new entrants need either to invest in old mills or revamp projects, or to build new plants while shutting down an equivalent amount of outdated capacity.

Segment Opportunities Some of the major steel producers in China have voiced plans to expand the production of high-end steel products and specialised steel while cutting down on low-value steel production. It is expected that the demand for higher-value steel will be supported by the development of automotive and machine manufacturing. There are good opportunities in the segment concerned with high-end steel products used in high-speed rail, automotive and ocean maritime engineering projects, which China currently imports because it lacks the technology and know-how for their production.

Government Policy The government actively supports the sector’s development, as it is considered one of the key pillars of the Chinese economy. In May 2016 the Ministry of Finance (MOF) implemented a plan to facilitate M&As, debt restructurings and bankruptcy rulings by adapting tax, accounting and land administration policies. In 2017, the MOF reduced export tariffs for some steel producers to stimulate exports. At the same time, steel producers have been subjected both to capacity reduction targets and to more stringent supervision of compliance with environmental protection requirements.

Source: NBS, CEIC, World Steel Association, CISA

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Sector Snapshot China Iron and Steel

PRODUCTION 928.3mn tonnes 1,106mn tonnes Crude Steel Steel Products EXPORTS 69.5mn tonnes Export Volume USD 60,894mn Share in World Crude Steel Exports Value Production: 51%

SALES 1,090mn tonnes Steel Products Sales 140.2mn tonnes IMPORTS Crude Steel Sales 13.2mn tonnes Import Volume USD 16,442mn Import Value

KEY PLAYERS SALES REVENUES* 1. Baoshan Iron and Steel: RMB 289.1bn 2. Hbis: RMB 109bn 3. Hunan Valin Steel: RMB 76.5bn 4. Maashan Iron and Steel: RMB 73.2bn 5. Shanxi Taigang Stainless Steel: RMB 67.8bn

Note: Data for 2018. * Data for 2017. Source: NBS, CISA, GAC, CEIC, World Steel Association, Company Data

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Sector Snapshot China Iron & Steel

In 2018, the Chinese iron and steel sector was supported by domestic investment in infrastructure and the strong performance of the construction sector, both maintaining relatively high growth rates. At the same time, the Chinese government continued to implement supply-side reforms in the sector aimed at reducing overcapacity, which forced many small or ineffective companies to exit the market. According to the new regulations announced in 2018, steel smelters were allowed to add new steel production capacity only if they eliminate certain amount of outdated capacity. During the winter season from November 2017 to March 2018, the scheduled production cuts in China’s steel sector were different for each mill depending on its emission levels, which stimulated companies to improve their efficiency. The robust demand for steel on the domestic market, combined with the tightening control over production, led to an increase in steel product prices. According to CISA, in 2018 the average value of China Steel Price Index (CSPI) reached 114.75, up by 6.5% y/y.

The strong domestic demand resulted in a record-high y/y growth in crude steel output. In 2018, China produced 928.3mn tonnes of crude steel, representing a significant increase of 11.6% over 2017. At the same time, the output of steel products rose by 5.5% y/y, exceeding 1.1bn tonnes.

The sales volume of steel products reached almost 1.1bn tonnes, marking an increase of 5.7% y/y. In 2018, China’s steel products self-sufficiency rate was 98% in 2018. About 58% of the total volume of steel products was sold by large and medium enterprises, which in 2018 sold 596.6mn tonnes of steel products, up by 1.9% y/y.

In contrast with the stronger domestic demand for steel products, external demand decreased in 2018 for a third consecutive year. In 2018, the volume of steel product exports from China dropped by 8.1% y/y to 69.5mn tonnes, mainly as a result of the increased number of antidumping and countervailing investigations launched by the US, EU, India and other countries against Chinese steel products. In value terms, steel exports increased by 11.4% y/y to USD 60.9bn, which was attributable to the higher product prices. The import volume of steel products also marked a y/y decline in 2018, falling by 1% y/y to 13.2mn tonnes. In value terms, imports rose by 8.4% y/y to USD 16.4bn, following the increase in steel prices and the RMB depreciation against the USD.

Stable demand for steel in 2018, along with the continuous government effort to reduce the overcapacity of China’s steel mills, resulted in falling inventories of iron and steel products. At the end of 2018, the value of finished steel product inventories in China witnessed a decline of 0.7% y/y, falling to RMB 229.8bn, compared with RMB 231.3bn as of end-2017.

Source: NBS, GAC, CISA, CEIC, World Steel Association

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Driving Forces

China is the largest developing country in the world and one of its fastest-growing economies. The iron and steel industry is among the mainstays of economic development, as it supplies sectors such as infrastructure, construction, automotive manufacture and machine-building.

The development of the iron and steel sector will be shaped by the growth of China’s economy, the urbanisation of the country, the demand for higher value-added and specialised steel products, and consolidation in the sector.

External The government has plans for further expansion of the country’s infrastructure, with a focus on roads and railways, which will create demand for the steel sector’s products. According to a projection by the United Nations, in 2030 some 68.7% of the population in China will live in urban areas, compared to 55.6% in 2015. This urbanisation will support the demand for buildings and intra-city traffic infrastructure.

It is anticipated that the growth model of China will change, with the importance of services rising at the expense of manufacturing and construction. For the steel sector this will translate into pressure to increase the production of higher value-added steel products and investments in new technologies, to meet the demand of sectors outside construction and infrastructure. As a result, although the volume of steel production may stagnate or increase slower than would have been expected on historical grounds, the revenues of the sector’s companies will be higher.

Internal The main internal driver for the development of the iron and steel sector in China is the ongoing consolidation and the closure of small and inefficient enterprises that employ polluting and outdated technologies. This process is likely to lead to improvements in the efficiency and business practices of the surviving companies.

Since 2015, foreign-owned companies have been allowed to hold majority stakes in domestic steel producers – compared to a 50% limit introduced in 2005. The opening of the industry has a positive impact on the adoption of modern steelmaking technologies and practices. On the one hand, domestic producers are facing stronger competition from foreign subsidiaries operating in the country. On the other, foreign companies are interested to have a presence in an expanding market for specialised steel products.

Source: United Nations

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Restraining Forces

Currently, the iron and steel industry is going through hard times, with both external and internal factors restraining its growth. Although the influence of excess capacity and low prices may be expected to diminish in the medium term, dependence on one market and on imported resources will shape the development of the industry in the long term.

External The iron and steel sector is extremely dependent on the domestic market, which makes it very vulnerable to fluctuations in economic activity in the country. The external market cannot be a substitute for, or cushion the effects of, a wobbly domestic market. In addition, the steel sector depends heavily on imported iron ore, as domestic iron ore is low-grade and insufficient in quantity to feed the steel capacity of the sector. This leaves the sector vulnerable to supply-driven price shocks, currency risk and insecure diversification of resources given the scale of the domestic production.

In recent years, China’s pollution and waste treatment regulations have been tightened and enforced more strictly. The sector’s compliance with the regulations requires investments in environmental protection facilities or even closure of some units that employ outdated technologies.

Another challenge for the steel sector is the increased protectionism of China’s major trading partners – the US and the EU – which often impose punitive duties on various steel products imported from China. The recent trade conflict between China and the US resulted in import tariffs of 25% on steel products, which the US imposed on China in March 2018.

Internal The excess capacity accumulated by the iron and steel sector in the past inhibits the development of the industry. It limits the room for new investments and for changes in companies’ product portfolios. The sector’s technological level is comparatively low and the share of R&D expenditures in the total revenues of metal processing companies is very limited. The sector’s products are characterised by high homogeneity and lack of innovations.

Although the government stimulates M&As in the sector, it is still highly competitive and unconsolidated. There are plenty of small producers that use outdated technology and low-quality raw materials. According to Beijing Lange Steel Information Research Center, in 2017 China’s top ten iron and steel producers had a share of just 37% in the sector’s total crude steel output, lagging far behind other large steel producing countries, such as Japan, South Korea, Russia and the US.

Source: World Steel Association, Beijing Lange Steel Information Research Center, CISA

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02 SECTOR IN FOCUS

China Iron & Steel Q4 2018

-17.9% -0.7% Total Profit, Product Inventory, % y/y change % y/y change 13.4% 18.6% -6.8% Sales Revenue, Crude Steel Output Crude Steel Sales Volume, y/y Volume, y/y y/y change change change

30.3% 35.4% Steel Products Steel Products Output Volume, Sales Volume, y/y y/y change change

228.8 284 1,668 109.4 .5

89.8 218.3

1,471 193.0

Sales Revenue, Total Profit, RMB Crude Steel Output, Steel Products RMB bn bn mn tonnes Output, mn tonnes

Q4 2017 Q4 2018

Source: NBS, CISA, CEIC

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Quarterly Summary

According to the data from China Iron and Steel Association (CISA), in the last quarter of 2018, the production volume of crude steel rose by 18.6% y/y to 228.8mn tonnes, while the production volume of steel products soared by 30.3% y/y, reaching 284.5mn tonnes. Many steel mills operated at increased capacity, encouraged by higher than expected profits during the year, as a result of outdated production capacity elimination and efficiency improvements. According to the National Bureau of Statistics (NBS), in Q4 2018 China’s ferrous metal smelting and pressing sector’s production capacity utilisation rate rose to 77.7%, up by 0.7 pp from Q4 2017.

In Q4 2018, the revenue of China’s ferrous metal smelting and pressing sector went up by 13.4% y/y, reaching nearly RMB 1.7tn, mainly as a result of the higher sales volume of steel products. In this period, China sold 301.1mn tonnes of steel products, marking a record high growth of 35.4% y/y. In the last quarter of 2018, the domestic demand for steel started to show signs of weakening, as a result of the slowdown in China’s manufacturing sector. In this period, the sales volume of crude steel dropped by 6.8% y/y to 30.2mn tonnes. In Q4 2018, steel prices witnessed a decline for the first time this year, as a result of low demand, while the production volume of steel was on the rise. According to CISA, at the end of November 2018 the average value of CSPI fell to 106.4 (down by 10.3% y/y), while at the end of December it dropped to 107.1 (down by 12.1% y/y).

In Q4 2018, the total profit of the ferrous metal smelting and pressing sector shrank by 17.9% y/y to RMB 89.8bn, due to the drop in product selling prices.

According to the most recent data published by the General Administration of Customs (GAC), in the last quarter of 2018 China’s exports of steel products rose by 9.1% y/y to USD 14.6bn. In this period, China exported 16.4mn tonnes of steel products, up by 2.4% y/y, as weaker demand for steel products on the domestic market stimulated Chinese steel enterprises to export. In Q4 2018, China imported 3.2mn tonnes of steel products, valued at USD 3.9bn, representing a decline of 2.7% y/y both by volume and value. Imports of steel products was hit by weakening demand, combined with RMB depreciation against the USD, which made imported products more expensive.

According to the NBS, there were a total of 5,138 enterprises operating in China’s ferrous metal smelting and pressing sector at the end of December 2018, down by 39.9% in just one year. This is a result of China’s efforts to rein in steel overcapacity by closing a number of steel plants, as well as the ongoing consolidations in the sector. At the end of Q4 2018, there were a total of 1,100 loss- making ferrous metal smelting and pressing enterprises, almost the same number as in Q4 2017 .

Source: CISA, GAC, CEIC, NBS

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Sector Outlook

Comments According to the forecast released by China Metallurgical Industry Planning and Research Institute (MPI) on December 10, 2018, in 2019 China's steel demand will drop to 800mn tonnes, while crude steel production will fall to 900mn tonnes. Shrinking steel consumption in China’s weakening automotive industry and the expected decline in property investment will be the main factors behind the drop in demand and production of steel. Domestic demand, rather than exports, will be the main driver for the sector’s development in the next few years. Exports will continue to suffer from the increasing protectionism of China’s major trading partners, such as the US, the EU and India. The government’s efforts to cut overcapacity and improve production efficiency in the iron and steel sector will continue to impact China’s steel output. The government is determined to continue its battle against pollution by restricting new capacity addition in some heavy-polluting sectors, including the iron and steel sector. The Three-year Plan on Defending the Blue Sky, released by the State Council in June 2018, focuses on the relocation and closure of heavy polluting steel enterprises, as well as on strict control over new capacity addition in key areas.

Steel Production Quarterly Forecast Steel Production Annual Forecast

1.0% 2.0%

1.0%

237.1 -1.5% 899.7 -1.0% 900.1 230.6 -2.0% 882.1 -3.5% 882.0 214.3

218.0 -3.0% 873.3 211.1 -4.5% -4.7% Q1 2019f Q2 2019f Q3 2019f Q4 2019f Q1 2020f 2019f 2020f 2021f 2022f 2023f

Production, mn tonnes % y/y change Production, mn tonnes % y/y change

Source: EMIS Insights, The Economic Daily

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Sector Highlights

Shandong Province’s Plan for High-Quality Development of Iron and Steel Sector

On October 29, 2018, the Shandong Provincial Government issued the Implementation Plan to Accelerate High-Quality Development of Seven Industries with High Energy Consumption. The main target is to increase operational efficiency by transforming several high energy-consuming sectors, including the iron and steel sector. According to the document, steel production capacity in cities of the air pollution transmission channel in Beijing-Tianjin-Hebei area shall be strictly controlled in the next five years. By 2022, the steel production capacity in the cities of Jinan, Zibo, Liaocheng and Binzhou will be cut by 70%, while the steel production capacity in coastal areas, such as Qingdao, Dongjiakou, Rizhao Lushan, Linyi and Lingang, will account for more than 50% of the total steel production capacity in Shandong. By 2025, the share of the two largest Shandong steel companies in the province’s steel output has to reach 70%. Steel production in electric furnaces will be promoted. By 2025, the steel made in electric furnaces will reach about 20% of the total, and the alloy steel (including stainless steel) should account for more than 20% of the total steel production in Shandong.

EU To Set Limits on Steel Imports from China On February 1, 2019, the European Commission announced that it plans to impose limits on EU's steel imports. Import quotas will affect 26 steel product categories from leading steel exporters to the EU, including China. They will be set, based on the average volume of steel the country exported to the EU during the period from 2015 to 2017. Steel imports above the set quotas will be imposed a 25% import duty. The import caps will rise by a further 5% on July 1, 2019, and by another 5% a year later. These safeguard measures will be valid until July 2021.

International Capacity Cooperation of Hebei Iron and Steel Enterprises On February 18, 2019, the Hebei Provincial Development and Reform Commission and the Provincial Department of Commerce issued the Implementation Plan for International Capacity Cooperation of Hebei Iron and Steel Enterprises, encouraging Hebei iron and steel companies to invest overseas. According to the target, by the end of 2020, Hebei iron and steel enterprises should expand their overseas capacity to 12mn tonnes. One of the four key cooperation regions is Asia with neighbouring countries such as Indonesia, Malaysia, the Philippines, Vietnam, Thailand, India and Pakistan, whose advantages include rich resources, promising market demand and preferential policies. Other key regions are Europe, Africa, South America and Oceania. The successful experience from the acquisition of Serbia’s steel mill Zelezara Smederevo by China’s second largest steel company, Hbis Group Co Ltd, shall be utilised. HBIS Group Serbia Iron and Steel, Hbis Group’s subsidiary, will start the construction of a Sino-Serbia Friendly (Hebei) Industrial Park in Smederevo in 2019.

Source: The Economist, Caixin, Reuters, Shandong Provincial Government Office

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Main Sector Indicators

Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018

Real GDP, % y/y change 6.8 6.8 6.7 6.5 6.4

GDP, Nominal, RMB bn 23,235 19,792 21,930 22,950 25,360

Value Added, Ferrous Metal Smelting & Pressing, % y/y change -1.9 5.2 6.7 7.5 9.9

Producer Price Index, Ferrous Metal, % y/y change 7.9 1.3 0.8 3.0 6.9

Purchasing Price Index, Ferrous Metal Material, % y/y change 13.4 7.1 6.7 6.3 4.5

Fixed Asset Investment (FAI), RMB bn 17,321 10,076 19,655 18,613 15,219

Exchange Rate USD/RMB, period-end 6.5 6.3 6.6 6.9 6.9

Pig Iron Production, mn tonnes 164.6 175.0 197.8 205.8 192.5

Crude Steel Production, mn tonnes 193.0 212.2 239.0 248.3 228.8

Steel Products Production, mn tonnes 218.3 246.9 283.9 290.2 284.5

Pig Iron Sales Volume, mn tonnes 13.3 12.6 13.5 13.0 13.5

Crude Steel Sales Volume, mn tonnes 32.4 32.9 38.9 38.2 30.2

Steel Products Sales Volume, mn tonnes 222.4 223.4 295.6 269.5 301.1

Product Inventory, Ferrous Metal Smelting & Pressing Sector, period-end, 231.3* 260.9 238.0 249.5 229.8 RMB bn

Ferrous Metal Smelting & Pressing Sector Revenue, RMB bn 1,471* 1,433 1,620 1,680 1,668

Ferrous Metal Smelting & Pressing Sector Cost of Sales, RMB bn 1,268* 1,284 1,438 1,473 1,490

Ferrous Metal Smelting & Pressing Sector Total Profit, RMB bn 109.4* 79.8 107.8 125.6 89.8

Steel Product Exports, USD mn 13,373 13,183 17,411 15,709 14,591

Steel Product Imports, USD mn 4,000 4,312 4,098 4,139 3,893

* NBS Data after Adjustment Source: Source: CISA, GAC, CEIC, NBS

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Main Sector Indicators (cont’d)

Production Production Volume, mn tonnes

In Q4 2018, the output of pig iron, crude steel and steel products rose by 16.9% y/y, 18.6% y/y and 290.2 284.5 30.3% y/y to 192.5mn tonnes, 228.8mn tonnes and 283.9 248.3 246.9 239.0

284.5mn tonnes, respectively. In the last quarter 228.8 218.3 212.2 205.8 197.8

of 2018, the demand for steel from the 193.0 192.5 175.0 automotive and home appliance manufacturing 164.6 sectors started to weaken, which caused a drop in steel prices in the last two months of the year. The NBS data shows that in Q4 ex-factory industrial producer prices in China’s ferrous metal smelting and pressing grew at an average rate of 3.2% y/y, compared with 9.7% y/y in Q3 and 13.5% Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 in Q2. Steel Produc ts Crude Steel Pig Iron

Sales Sales Revenue of Ferrous Metal Smelting & Pressing Sector In Q4 2018, the sales revenue of China’s ferrous metal smelting and pressing sector rose by 13.4% 22.4% y/y to nearly RMB 1.7tn on the back of increased 20.4% sales volume of steel products. In this period,

China sold 301.1mn tonnes of steel products, up 15.0% by 35.4% y/y, of which 150.7mn tonnes were sold 13.4%

by large and medium enterprises. The share of 11.1% 1,680 1,668 large and medium enterprises in the total sales 1,620 of steel products in China dropped to 50% in Q4 1,471

2018, compared to 66.1% in the same period of 1,433 2017. A number of small steel mills worked at elevated capacity, taking advantage of higher Q4 2017* Q1 2018 Q2 2018 Q3 2018 Q4 2018 margins and firm demand in 2018. In Q4 2018, the slowdown in the sector’s revenue y/y growth was Sales Revenue, RMB bn % y/y change a result of the drop in steel prices in this period. * NBS Data after Adjustment Source: CISA, CEIC

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Main Sector Indicators (cont’d)

Exports Steel Product Exports

In Q4 2018, the value of China’s steel product 18.9% exports rose by 9.1% y/y to USD 14.6bn, as a result 17.2% of the increased export volume and currency depreciation. In this period, China exported 16.4mn tonnes of steel products, representing an 9.1% increase of 2.4% y/y. The positive performance was mainly due to the weakening domestic 15,709 14,591 17,411 demand for steel, which stimulated Chinese 13,373 0.2% 13,183 companies to look for export opportunities. -0.6%

Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018

Ex ports, USD mn % y/y change

Imports Steel Product Imports

During the last quarter of 2018, the imports of steel products declined by 2.7% y/y both in value 19.1% 19.3% and volume terms, due to the weaker domestic demand for steel products. The RMB depreciation against the USD made imports more expensive, 10.2% 7.8% which was another reason for the decline. In this 4,312 period, China imported 3.2mn tonnes of steel 4,098 4,000 products, valued at USD 3.9bn. 4,139 3,893 -2.7%

Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018

Imports, USD mn % y/y change

Source: GAC, CEIC

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Top M&A Deals

Top M&A Deals in China’s Iron and Steel Sector, Q1 2018 – Q1 2019

Country of Deal Value Date Target Company Deal Type Buyer Stake % Buyer USD (mn)

Jiangyin Xingcheng Special Steel Works Co 03-Jan-19 Acquisition Daye Special Steel Co Ltd China 3,376.8 86.5 Ltd Silicon and Steel Business of Beijing Shougang Zhixin Qian'an Electromagnetic 31-Mar-18 Acquisition China 2,138.1 100.0 Shougang Co Ltd Material Co Ltd

20-Apr-18 Inner Mongolia Baotou Steel Union Co Ltd Minority Stake Institutional Investor(s) n/a 1,597.9 16.7

Hunan Valin Xiangtan Iron and Steel Co Ltd ; Hunan Valin Lianyuan Iron and Steel Co 08-Dec-18 Ltd ; Hengyang Valin Steel Tube Co Ltd ; Acquisition Hunan Valin Steel Co Ltd China 1,268.6 100.0 Hunan Valin Energy Saving Power Generation Co Ltd

18-Jul-18 Chaoyang Iron and Steel Co Ltd Acquisition Angang Steel Co Ltd China 882.0 100.0

Four Rivers Investment Management Co; 10-Jan-18 Chongqing Iron & Steel (Group) Co Ltd Minority Stake Chongqing Strategic Emerging Industry Equity China 613.5 23.5 Investment Fund

15-May-18 Anyang Iron & Steel Inc Minority Stake Anyang Iron & Steel Group Co Ltd China 394.3 16.7

Langfang Guangyuan Metal Product Co 01-Feb-19 Ltd; Langfang Shengchi Metal Product Co Acquisition RiseSun Real Estate Development Co Ltd China 321.5 100.0 Ltd Qinghai Xigang Mining and Smelting 22-Feb-19 Acquisition Xining Special Steel Group Co Ltd China 91.7 51.0 Technology Co Ltd

16-Aug-18 Ma Steel Scrap Steel Co Ltd Acquisition Magang (Group) Holding Co Ltd n/a 25.8 55.0

20-Jan-18 Wuxi Longsheng Technology Co Ltd Minority Stake Institutional Investor(s) n/a 18.1 16.7

Xinxing Hebei Engineering & Research Inc 29-Aug-18 Acquisition Xinxing Ductile Iron Pipes Co Ltd China 15.6 80.0 Ltd China; Virgin Anhui Ma Steel K Wah New Building Maanshan Iron & Steel Co Ltd; Leader 16-Aug-18 Acquisition Islands 11.2 70.0 Materials Co Ltd Investments Co Ltd (British)

04-Apr-18 Baosteel Special Steel Shaoguan Co Ltd Acquisition SGIS Songshan Co Ltd China 10.7 100.0

Guizhou Tongren Jinrui Manganese 19-Dec-18 Minority Stake Sinosteel Anhui Tianyuan Technology Co Ltd China 4.7 26.5 Industry Co Ltd

Tianjin Oriental Jiangtian Section Steel Tianjin Tianzhong Giant Heavy Industry Co Ltd; 25-Jun-18 Acquisition China 1.5 100.0 Sales Co Ltd Tianjin Jiangtian Section Steel Co Ltd

Source: EMIS DealWatch

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M&A Activity, Q1 2018 – Q1 2019

Number and Value of Deals Deals by Type

4 4

3 3 Minority Stake 31%

2 3,790 2,770 2,004

1,273 Acquisition 935 69%

Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019

Value of Deals (USD mn) Number of Deals

Deals by Country of Investors Deals by Deal Value, USD

100.1- 1,000mn 25%

1,000.1mn- 10,000mn 25% China 93% Others 7%

50.1-100mn 6%

0-50mn 44%

Source: EMIS DealWatch

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03 COMPETITIVE LANDSCAPE

Highlights

Overview The level of competition in China’s iron and steel sector is significant. Changing domestic demand and overcapacity in the sector are the main reasons for the fluctuating steel prices in China. The government has been tightening control over environmental protection and the sector is facing increasing operational costs, since steel enterprises need to invest in new facilities and equipment. The number of M&As and company closures in the sector is increasing, as some low-efficiency companies are unable to bear the higher costs. In addition, consolidation in the sector is being encouraged by the government’s plan to form several large steel companies.

Market Structure There were 96 large and medium enterprises and over 5,000 small enterprises operating in China’s iron and steel sector in 2018. Most of the companies are small and medium-sized, with limited operations and small market shares. The share of the top ten largest players in 2017 production was just 37%, which means that the sector is characterised by low level of consolidation. For comparison’s sake, the share of the top two steelmakers in South Korea was 89.2% in 2017, while that of the top three steel producers in Japan was 81.5%, according to information from Beijing Lange Steel Information Research Center. The top four steel companies in Russia accounted for 78% of the country’s total steel output while the top three US steelmakers had a share of 57.7% of the total production of steel in 2017. To increase the sector’s consolidation and competiveness, China’s government encourages M&A deals between domestic steel companies. The major domestic players in China’s steel sector are Baowu Steel Group, Hbis Group, Ansteel Group and Shagang Group.

Foreign Players

Since March 2015, foreign companies have been allowed to become majority shareholders in Chinese companies. Previously, foreign players entered the iron and steel sector by forming JV factories or by acquiring small stakes in domestic companies. Large global players, such as Luxembourg-based ArcelorMittal, Korea’s POSCO, Japan’s Nippon Steel and Germany’s ThyssenKrupp, have subsidiaries in China. Foreign companies have brought capital, advanced technology and management skills, and are strong competitors in the high-end product market.

Source: NBS, World Steel Association, Beijing Lange Steel Information Research Center

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Main Players

Comments

In late September 2016, Baosteel Group, China’s second-largest steelmaker, and the sixth-largest, Wuhan Iron and Steel Group (Wisco), revealed details on the merger of the two companies announced in June 2016. Baosteel Group will merge its listed unit Baoshan Iron and Steel Co Ltd with its indebted Shanghai-listed peer Wisco by acquiring the latter for approximately RMB 26bn. On December 1, 2016 China Baowu Steel Group Corporation was officially established. Wuhan Iron and Steel Group was delisted after the completion of the deal and its shareholders received a 25.6% stake in the new company.

The new entity became the largest steel producer in China, with a crude steel production output of 65.4mn tonnes in 2017, and the second-largest in the world after ArcelorMittal, which had a capacity of 97mn tonnes in the same year. According to Bloomberg, the combined market shares of the two companies in China are over 60% on the autosheet market and over 80% on the silicon steel market. The total assets of China Baowu Iron and Steel are estimated to be RMB 730bn.

The merger of the companies was in line with the government’s rhetoric of encouraging consolidation in the sector and reducing capacity. However, the deal will not necessarily reduce the capacity of the country, since both companies have eliminated outdated capacity in recent years and have built new plants. In addition, Baosteel is a profitable company while Wisco is indebted and relatively unprofitable. Credit agencies Moody’s and Standard&Poor’s, quoted by Bloomberg, had both warned about a possible negative credit outlook for Baosteel.

Source: Bloomberg, Reuters, China Daily

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Top Companies

Top Companies by Production Volume, mn tonnes

Company 2016 2017

Baowu Steel Group 63.81 65.39

Hbis Group 46.18 45.56

Shagang Group 33.25 38.35

Ansteel Group 33.19 35.76

Shougang Group 26.8 27.63

Shandong Steel Group 23.02 21.68

Maanshan Steel 18.63 19.71

Jianlong Group 16.45 20.26

Valin Group 15.48 20.15

Benxi Steel 14.4 15.77

Source: World Steel Association

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Top Companies (cont’d)

Top Listed Companies by Sales Revenue, RMB mn

Company 2016 2017

Baoshan Iron and Steel Co Ltd 185,459 289,093

Hbis Co Ltd 74,551 108,983

Hunan Valin Steel Co Ltd 49,811 76,511

Maanshan Iron and Steel Co Ltd 48,275 73,228

Shanxi Taigang Stainless Steel Co Ltd 56,738 67,790

Beijing Shougang Co Ltd 41,850 60,250

Inner Mongolia Baotou Steel Union Co Ltd 31,028 53,684

Xinyu Iron and Steel Co Ltd 30,461 49,967

Shandong Iron And Steel Company Ltd 50,143 47,898

Liuzhou Iron and Steel Co Ltd 26,650 41,557

Source: EMIS, Company Data

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04 COMPANIES IN FOCUS

Baoshan Iron and Steel Co Ltd

Quarterly Update § In Q3 2018, the sales revenue of Baoshan Iron & Steel (Baosteel) amounted to RMB 76.8bn, marking a slight decline of 1.1% y/y. While the sales volume witnessed y/y growth, the company’s average product selling prices were lower than in the same period of 2017, which was the main reason for the y/y decline in revenue. As a result of the company’s cost reduction measures and lower raw material cost, in Q3 2018 its operating cost decreased 5% y/y. Baosteel reported that in Q3 2018 its net profit rose by 8.7% y/y to RMB 6.3bn. In Q3 2018, Baosteel produced 11.7mn tonnes of iron and 12.4mn tonnes of steel, up by 2.1% y/y and 3.8% y/y, respectively, and sold 11.9mn tonnes of billets, up by 4.8% y/y.

§ In the end of January 2019, Baosteel announced that in 2018 its net profit attributable to shareholders is estimated to have reached between RMB 20.7bn and RMB 21.5bn, up by 8% to 12% over 2017, the highest growth rate in the company’s history. In Q4 2018, the net profit attributable to shareholders of the listed company is estimated to have declined by 14.2% to 0.2% over the previous quarter, mainly due to the falling steel prices. Although the average selling price of steel products in China started to fall in October 2018, Baosteel adjusted its product selling prices only in December 2018, due to low demand.

Income Statement, RMB mn

7,883

6,281 5,781 5,534 5,367 81,080 72,998 77,635 76,786 65,936 69,848 67,347 67,454 2,572 64,009 56,427 37,256 24,019

Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018

Operating Revenue Operating Cost Net Profit

Source: Company Data

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Baoshan Iron and Steel Co Ltd (cont’d)

Highlights In 2017, the company’s operating performance improved significantly, with total operating revenue reaching RMB 292.4bn, up by 56.2% compared to that in the previous year. The company achieved a cost reduction of RMB 6.1bn for the whole year, exceeding the expected annual target. The net profit of the company was RMB 20.4bn, up from RMB 9.2bn in 2016.

The total assets of Baosteel decreased by 2.5% y/y to RMB 350.2bn. The non-current assets, which accounted for 61.9% of the company’s total assets, also decreased by 2.4% y/y to RMB 216.9bn with the value of land and buildings decreasing by 5.9% y/y to RMB 154.3bn and the long-term financial assets rising by 27.5% y/y to RMB 30.7bn. The current assets of the company declined by 2.5% y/y to RMB 133.3bn in 2017.

Income Statement, RMB mn Balance Sheet, RMB mn

8.9% 31.21

6.7%

14.69 359,068 350,235 292,356 174,472 234,123

2.0% 187,190

184,791 6.06 165,161 160,252 157,905 26,049 20,403 122,146 12,576 104,160 9,205 3,337 714.07

2015 2016 2017 2015 2016 2017 Total Assets Shareholders' Equity Operating Revenue EBITDA Net Profit EBITDA Margin Net Debt Net Debt/EBITDA

Source: Company Data

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Baoshan Iron and Steel Co Ltd (cont’d)

Company Background Major Stakeholders, June 30, 2018

Baosteel specialises in manufacturing and Number of Stakeholders Share, % trading of iron, steel products and by-products. It Stakes, mn was founded in 2000 by the state-owned Baosteel Group Corporation, and was listed on the Baowu Steel Group Corporation Ltd 11,300.1 50.75 Shanghai Stock Exchange during the same year.

In September 2016 Baosteel acquired Wuhan Iron Wuhan Iron and Steel Corpotation Ltd 2,982.2 13.39 and Steel Group for RMB 26bn. The two companies’ combined crude steel output reached China Securities Finance Co Ltd 1,091.0 4.90 58.4mn tonnes in 2016, which made Baosteel the largest steel manufacturer in China and second China National Petroleum Corporation Ltd 800.0 3.59 largest globally after ArcelorMittal.

In 2016, Baosteel transferred 800mn shares – or CNIC Corporation Ltd 653.5 2.93 4.86% of its total equity – to the country’s oil and gas producer China National Petroleum Corporation (CNPC). The transfer was estimated at RMB 3.92bn, based on the latest traded price of Revenue by Products, RMB mn, 2017 the company. In June 2016, CNCP transferred Hot-Rolled Carbon Steel 0.34% of its holdings in PetroChina to Baosteel Sheets and Group, in a deal estimated at RMB 4.5bn. Coils 76,011

In November 2018, Baosteel announced that it plans to build a new plant in Yancheng city, Steel Tubes and Pipes Jiangsu province, with high-class steel production 10,567 capacity of 20mn tpa. The first stage of the project is expected to cost RMB 50bn. Its annual Other Iron and Steel capacity will be between 8mn and 10mn tonnes. Products The construction of the first stage will start in Cold-Rolled 13,251 Carbon Steel Long Section 2019 and is expected to be finished within three Sheets and Products Coils 87,721 years. 7,274

Source: Company Data

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Hesteel Company Ltd

Quarterly Update § In the third quarter of 2018, the revenue of Hbis Co Ltd (Hbis) increased by 6.1% y/y to RMB 34.4bn, while its net profit jumped by 69.7% y/y to almost RMB 1.8bn. The positive results came as the company’s product selling prices increased between 6% y/y and 13% y/y for different products. The company continued to strengthen its management control, which led to significant reduction in the sales and management expenses and improved the company’s profitability. In the first half of 2018, Hbis produced 8.2mn tonnes of steel products, down by 9.5% y/y, as a result of tighter environmental control measures introduced by the government.

§On January 28, 2019, Hbis signed an agreement with TS Global Holdings (TSGH) Pte, a wholly-owned subsidiary of India-based Tata Steel Limited, to acquire its assets in Southeast Asia for USD 327mn. The total production capacity of Tata Steel in the region is 2mn tonnes. The divestment will be made to a company, in which 70% of the equity shares will be held by Hbis and 30% by TSGH.

Income Statement, RMB mn

1,752 1,760

1,037

619

429 34,432 32,446 31,142 29,937 28,713 25,941 22,493 22,077 22,148 26,140 18,887 -204 25,034

Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018

Operating Revenue Operating Cost Net Profit

Source: Company Data, Economic Times, Caixin

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Hesteel Company Ltd (cont’d)

Highlights In 2017, the total operating revenue of Hbis was RMB 109.1bn, up by 46% compared to that in the previous year. The company’s operating profit was RMB 3.1bn and the EBITDA was RMB 4.1bn.

In 2017, the company’s net profit attributable to shareholders improved to RMB 2.1bn, up by 48.7% compared to that in 2016. The basic earnings per share reported by Hesteel in 2017 were RMB 0.17, up from RMB 0.15 in 2016, representing an increase of 13.3% y/y.

The company’s total assets in 2017 were RMB 190.2bn, up by 2.25% compared to the end of the previous year. The non-current assets increased by 5.1% y/y to RMB 137.9bn with the value of land and buildings increasing by 13.3% y/y. The company’s long-term assets rose by 8.2% y/y to RMB 3.1bn. On the other hand, the current assets of Hesteel decreased by 4.7% y/y to RMB 52.2bn.

Income Statement, RMB mn Balance Sheet, RMB mn

3.7%

200.35

2.5% 190,148 185,990 109,136 178,812

66.38 47,659 74,741 125,474 125,088 73,195 116,536 0.8% 30.89 4,062 46,630 45,596 2,126 1,884 1,430 582 401.75

2015 2016 2017 2015 2016 2017 Total Assets Shareholders' Equity Operating Revenue EBITDA Net Profit EBITDA Margin Net Debt Net Debt/EBITDA

Source: Company Data

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Hesteel Company Ltd (cont’d)

Company Background Major Stakeholders, 30 June 2017

The history of Hbis dates back to 1994, when Number of Tangshan Iron and Steel Group Co Ltd founded Stakeholders Share, % Stakes, mn the Tangshan Iron and Steel Co Ltd, which was listed on the Shenzhen Stock Exchange in 1997. Handan Iron and Steel Group Co Ltd 4,218.8 39.73 When Tangshan Iron and Steel acquired Handan Iron and Steel Group Co Ltd, and Chengde Xinxin Vanadium and Titanium Co Ltd in 2010, it was Tangshan Iron and Steel Group Co Ltd 1,853.4 17.45 renamed Hebei Iron and Steel Co Ltd. In January

2018, the company’s English name – Hesteel Co Chengde Iron and Steel Group Co Ltd 432.1 4.07 Ltd – was changed to Hbis Co Ltd.

China Securities Finance Corporation Hbis is engaged in the smelting, processing and 224.3 2.11 Limited distribution of iron and steel products. Its annual steel production capacity was 30mn tonnes as of end-2017. In 2017, the company had 120,000 Hegang Group Mining Co Ltd 92.0 0.87 employees, among them 12,000 located overseas.

In 2013, Hesteel acquired a 74.5% stake in South Revenue by Product, RMB mn, 2017 Africa’s Palabora Mining Company (PMC) – a copper mining, smelting and refining firm – from the Anglo-Australian giant Rio Tinto, hoping to Steel Products Others generate annual revenue of USD 10bn within 82.4% 14.9% three years. The company has also invested in mines in Brazil, Canada, Australia and the Republic of Congo. In December 2014, Hbis acquired 51% of the world's largest steel trader and integrated service provider, Switzerland's Duferco International Trade Holding. Steel Billet In April 2016 Hbis acquired the Serbian steel mill 2.0% Zelezara Smederevo for EUR 46mn. In 2016 and Vanadium 2017 Hbis invested about USD 270mn in it, Products boosting its crude steel output to 1.5mn tpa in 0.7% 2017, compared to just 875,000 tonnes in 2015.

Source: Company Data, Reuters, China Daily

CHINA IRON AND STEEL SECTOR 2019 Q1 32 An EMIS Insights Industry Report 04 COMPANIES IN FOCUS CONTENTS

Hunan Valin Steel Co Ltd

Quarterly Update § In the third quarter of 2018, the revenue of Hunan Valin Steel Co Ltd (Valin Steel) rose by 19.5% y/y, reaching almost RMB 25.2bn. The company’s net profit increased by 22.2% y/y to RMB 2.6bn. The positive results were attributed mainly to the increase in the company’s average product selling price and sales volumes. In Q3 2018, Valin Steel produced 4.3mn tonnes of iron, 5.2mn tonnes of crude steel and 4.8mn tonnes of steel products, up by 8.9% y/y, 9.8% y/y and 5.5% y/y, respectively.

§ On December 7, 2018, Valin Steel announced that it has signed an agreement to acquire a controlling stake in Guangdong Yangchun New Steel Co Ltd. Upon completion of the deal, the steel output of Valin Steel is expected to reach 24mn tpa.

§ In the end of January 2019, Valin Steel released its preliminary annual results, according to which its net profit is estimated to have reached between RMB 8.5bn and RMB 8.8bn, up by 60% y/y to 65% y/y. In 2018, the company produced 19.7mn tonnes of crude steel, representing an increase of 14% y/y. Its net profit per tonne of crude steel was between RMB 428 and RMB 444, up by 40% to 45%, compared with 2017. Both the crude steel output and the net profit per tonne hit record high growth rates.

Income Statement, RMB mn

2,597 2,365 2,126 1,984 1,896 25,162 17,051 23,498 21,060 20,425 20,280 19,983

832 19,418 17,593 16,748 16,739 15,053

Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018

Operating Revenue Operating Cost Net Profit

Source: Company Data, Hunan Daily

CHINA IRON AND STEEL SECTOR 2019 Q1 33 An EMIS Insights Industry Report 04 COMPANIES IN FOCUS CONTENTS

Hunan Valin Steel Co Ltd (cont’d)

Highlights In 2017, the operating revenue of Hunan Valin Steel reached RMB 76.9bn, up by 53.6% compared to the previous year. The increase was driven by the strong performance of the company’s main business, steel plates manufacturing, and the increase in product prices. The operating profit of the company was RMB 5.4bn and the EBITDA was RMB 5.5bn.

In 2017, Hunan Valin recorded a positive financial result for the first time in three years. The company’s net profit attributable to shareholders amounted to RMB 5.3bn after net losses of RMB 1.6bn in 2016 and RMB 4.02bn in 2015.

The total assets of Hunan Valin in 2017 were RMB 74.9bn, up by 5.6% y/y. The non-current assets were RMB 45.1bn, down by 4.5% y/y, and the current assets rose by 25.8% compared to those in 2016.

Income Statement, RMB mn Balance Sheet, RMB mn

7.2% 9.89

-13.96

-2.7% 76,849 76,499 74,930 70,946 50,032 41,567 55,747 54,965 54,560 5,514 5,296 14,581 1,333 3,995 1,553 9,297 - - - 10,674 -9.6% -41.25

2015 4,019 2016 2017

- 2015 2016 2017 Operating Revenue EBITDA Total Assets Shareholders' Equity Net Profit EBITDA Margin Net Debt Net Debt/EBITDA

Source: Company Data

CHINA IRON AND STEEL SECTOR 2019 Q1 34 An EMIS Insights Industry Report 04 COMPANIES IN FOCUS CONTENTS

Hunan Valin Steel Co Ltd (cont’d)

Company Background Major Stakeholders, 2017

Hunan Valin Steel was founded in 1997 and its Number of Stakeholders Share, % shares were listed in the Shenzhen Stock Stakes, mn Exchange in 1999. The company is engaged in the smelting, manufacturing and sale of iron and Hunan Valin Iron and Steel Group Co Ltd 1,819.1 60.32 steel products. Its major shareholder is the state- owned Valin Group with a 60.32% share. Shenzhen Qianhai Eagle Fund Management Co Ltd - Hunan State-Owned Enterprises 140.8 4.67 Innovation Private Equity Investment Fund In 2005, the Luxembourg-based ArcelorMittal bought a 37.17% stake of Valin Steel’s wholly- Li Donglin 24.8 0.82 owned subsidiary, Hunan Valin Steel Tube Wire Co Ltd, which was the first large investment of a major foreign steel company in a Chinese steel Sichuan Langxin Investment Co Ltd 18.2 0.6 company. In 2016, ArcelorMittal sold out its entire China Merchants Bank Co Ltd - Everbright stake in Valin Steel, due to the latter’s planned Prudential Advantage Hybrid Securities 18.1 0.6 restructuring. Investment Fund

In 2008, ArcelorMittal and Valin Steel announced the establishment of an automotive steel JV Revenue by Product, % of total, 2017 company, Valin ArcelorMittal Automotive (VAMA). Long Steel Pipes It became operational in 2014 with ArcelorMittal Products 8.5% holding a 49% stake in it. 23.2%

Valin Steel has three steel-making subsidiaries – Valin Xiangtan Iron & Steel in Xiantan with an annual capacity of 6.5mn tonnes of steel products, mainly rebar, wire rod, round bars and heavy plates; Valin Lianyuan Iron & Steel in Loudi Others city producing about 6.5mn tonnes of steel 20.0% products such as rebar, sections, hot rolled coils, cold rolled coils, hot dip galvanized coils and hot Steel Plates rolled narrow strips; and Valin Steel Pipe Holding 48.4% Co., Ltd. with plants in Hengyang and Wuxi, is specializes in production of seamless pipes with output of approximately 1.5mn tonnes.

Source: Company Data, China Daily, Financial Times

CHINA IRON AND STEEL SECTOR 2019 Q1 35 An EMIS Insights Industry Report 04 COMPANIES IN FOCUS CONTENTS

Maanshan Iron & Steel Co Ltd

Quarterly Update § In the third quarter of 2018 the revenue of Maanshan Iron & Steel (Masteel) marked a significant increase of 30.4% y/y, reaching RMB 23.1bn. The growth in revenue was supported by higher selling volume and rising selling product prices. The government-led environmental inspection campaigns were the main reason for the steel product price increase. In Q3 2018, the company produced 4.7mn tonnes of iron, 5.1mn tonnes of crude steel and 4.9mn tonnes of steel products, up by 9.6% y/y, 8.7% y/y and 11.9% y/y, respectively. In this period, the company’s net profit exceeded RMB 2.5bn, representing a 78.8% y/y increase.

§ In the end of January 2019, Masteel announced that its net profit attributable to shareholders is estimated to have grown by 43.3% y/y to RMB 5.9bn in 2018.

Income Statement, RMB mn

2,534 2,226

1,751 1,630 1,417 23,054 17,851 21,755 20,363 19,456 18,308 17,677

895 17,115 17,001 16,887 15,246 15,956

Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018

Operating Revenue Operating Cost Net Profit

Source: Company Data, CICC

CHINA IRON AND STEEL SECTOR 2019 Q1 36 An EMIS Insights Industry Report 04 COMPANIES IN FOCUS CONTENTS

Maanshan Iron & Steel Co Ltd (cont’d)

Highlights In 2017, the total operating revenue of Maanshan Iron & Steel surged by 52.3% y/y to RMB 74bn. The operating profit of the company was RMB 5.7bn against RMB 1.2bn in the previous year and the EBITDA reached RMB 6.4bn from RMB 2.3bn in 2016. The net profit attributable to shareholders increased to RMB 5.07bn from RMB 1.3bn in 2016.

In 2017, the total assets of Maanshan Iron & Steel were RMB 72.2bn, up by 9% y/y. Of these, the company’s non-current assets decreased by 4.1% y/y to RMB 40.1bn. The decrease was due to a 6.7% y/y decline in the value of land and buildings. The long-term assets of Maanshan Iron & Steel surged by 48.9% y/y to RMB 2.8bn. The current assets of the company rose by 31.5% y/y to RMB 32.1bn with the value of inventories increasing by 8.5% y/y to RMB 11.5bn.

Income Statement, RMB mn Balance Sheet, RMB

8.6% 16.80

4.8% 73,977 72,192 66,246 62,454 48,571 45,203 6.25 6,396 5,072 39,976 38,853 3,474 36,570 - 2,312 1,257 27,237

-7.7% 22,081 20,742

2015 2016 2017 2015 2016 2017 5,104 - Total Assets Shareholders' Equity Operating Revenue EBITDA Net Profit EBITDA Margin Net Debt Net Debt/EBITDA

Source: Company Data

CHINA IRON AND STEEL SECTOR 2019 Q1 37 An EMIS Insights Industry Report 04 COMPANIES IN FOCUS CONTENTS

Maanshan Iron & Steel Co Ltd (cont’d)

Company Background Major Stakeholders, June 30, 2018

Maanshan Iron & Steel is one of the largest Number of Stakeholders Share, % producers and sellers of iron and steel products Stakes, mn in China. It was founded in 1993 and was one of the nine pilot joint-stock limited enterprises that Magang (Group) Holding Co Ltd 3,506.5 45.54 formed the first batch of Chinese companies Hong Kong Securities Clearing (Agent) Co listed abroad. The company’s first H-shares were 1,716.2 22.29 Ltd issued overseas in October 1993 and were listed on the Hong Kong Stock Exchange in November 1993. The company’s shares were then listed on Central Huijin Investment Ltd 142.2 1.85 the Shanghai Stock Exchange in 1994. China Merchants Bank Co Ltd - Everbright Prudential Advantage Hybrid Securities 44.5 0.58 On November 13, 2006, Maanshan Iron & Steel Investment Fund issued bonds with warrants on the Shanghai Stock Exchange. Hong Kong Securities Clearing Co Ltd 41.9 0.54

On November 29, 2006, the company’s bonds and warrants were listed on the Shanghai Stock Exchange . Revenue by Product, % of total, 2017

The company’s main businesses include iron Long Products manufacturing and steel making and rolling. The 44% company’s major products are steel plates, accounting for 57.5% of the company’s revenue in 2016, long products, including steel and wire rod, which accounted for 39.3% and wheels and axles.

Wheels and Steel Plates Axles 3% 53%

Source: Company Data

CHINA IRON AND STEEL SECTOR 2019 Q1 38 An EMIS Insights Industry Report 04 COMPANIES IN FOCUS CONTENTS

Shanxi Taigang Stainless Steel Co Ltd

Quarterly Update § In the third quarter of 2018 the revenue of Shanxi Taigang Stainless Steel Co Ltd (TISCO) increased by 6.5% y/y to RMB 18.3bn, mainly as a result of the higher selling product prices. The company’s net profit declined by 12.8% y/y to RMB 1.2bn, which it attributes to a delay in the deferred revenue transfer.

§ On September 17, 2018, TISCO announced that its shares resume trading after a six-month halt, while the company will still continue to work on its major assets restructuring. TISCO also announced that it plans to purchase a controlling 51% share of Linyi Xinhai New Materials Co (Xinhai) – a manufacturer of nickel-iron alloy, which is the main raw material used by TISCO to produce stainless steel products.

§ In the end of January 2019, TISCO announced that according to its preliminary financial results, in 2018 the company’s net profit has reached between RMB 4.8bn and RMB 5.2bn, representing an increase of between 3.9% y/y and 12.5% y/y.

Income Statement, RMB mn

2,305

1,437 1,389 1,364 1,212 17,581 18,107 18,663 16,207 17,172 15,330 15,120 18,296 14,296 14,104 13,133 15,518 388

Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018

Operating Revenue Operating Cost Net Profit

Source: Company Data

CHINA IRON AND STEEL SECTOR 2019 Q1 39 An EMIS Insights Industry Report 04 COMPANIES IN FOCUS CONTENTS

Shanxi Taigang Stainless Steel Co Ltd (cont’d)

Highlights In 2017, the total operating revenue of Shanxi Taigang Stainless Steel reached RMB 67.8bn, which represented an increase of 19.2% y/y. The company’s operating profit was RMB 4.5nm and the EBITDA was RMB 5.3bn in 2017. The net profit attributable to shareholders rose to RMB 4.4bn from RMB 1.02bn in the previous year.

The total assets of Shanxi Taigang Stainless Steel reached RMB 74.5bn in 2017, up by 2.5% compared to the previous year. The non-current assets held by the company decreased by 6.1% y/y to RMB 52.2bn due to a decrease in the value of land and buildings and construction in progress. On the other hand, the long-term financial assets of the company rose by 26.1% y/y to RMB 1.7tn. The current assets of Shanxi Taigang Stainless Steel were RMB 22.3bn, representing an increase of 30.7% y/y.

Income Statement, RMB mn Balance Sheet, RMB mn

17.29 7.8%

4.4% 67,926 67,832 74,496 72,656 72,448 56,910 6.94 5,325 4,369 45,607 2,221 2,478 42,858 - 1,022 36,964 27,339 23,183 -3.3% 22,092

2015 3,826 2016 2017 - 2015 2016 2017

Operating Revenue EBITDA Total Assets Shareholders' Equity Net Profit EBITDA Margin Net Debt Net Debt/EBITDA

Source: Company Data

CHINA IRON AND STEEL SECTOR 2019 Q1 40 An EMIS Insights Industry Report 04 COMPANIES IN FOCUS CONTENTS

Shanxi Taigang Stainless Steel Co Ltd (cont’d)

Company Background Major Stakeholders, June 30, 2018

TISCO is engaged in the manufacturing and Number of Stakeholders Share, % distribution of stainless steel and other steel Stakes, mn products. The company was founded in 1997, after the asset restructuring of Taiyuan Iron and Steel Taiyuan Iron and Steel (Group) Co Ltd 3,571.4 62.7 (Group) Co Ltd, and was listed on the Shenzhen Stock Exchange in 1998. it employed 19,901 Central Huijin Investment Ltd 81.2 1.43 persons in 2017.

TISCO owns six plants and 20 sales centres. Its Shanxi International Power Group Co Ltd 45.1 0.79 parent company Taiyuan Iron and Steel (Group) Co Ltd operates three mines. At the end of 2017, National Social Security Fund 108 27.0 0.47 stainless steel accounted for more than half of combination the company’s total production capacity, followed by steel and ultra-fine powder. Hong Kong Securities Clearing Co Ltd 21.3 0.37 In 2017, the company completed the consolidation of its financial statements with its overseas subsidiaries in the US, Europe and Russia, thus Revenue by Product, % of total, 2017 expanding its international sales channels and export opportunities. In 2017 its revenue from Steel 18.8 Ultra-Fine overseas deals jumped by 39.4% y/y to RMB Powder 15.4 12.7bn.

In 2018, TISCO was ranked 1,332nd in the Forbes’ 2018 Global 2000 List, and 119th in 2018 China Fortune 500 List.

Others 10.9

Stainless Steel 52.1

Source: Company Data

CHINA IRON AND STEEL SECTOR 2019 Q1 41 An EMIS Insights Industry Report CHINA IRON AND STEEL SECTOR 2019 Q1 An EMIS Insights Industry Report CONTENTS

05 REGULATORY ENVIRONMENT

Government Policy

Key Bodies The Ministry of Industry and Information Technology (MIIT) supervises the iron and steel industry’s enterprises via preparation and implementation of policies and development plans. MIIT also has powers in the area of emission reductions, closure of plants with outdated technologies, and energy conservation. The Ministry of Ecology and Environment (MEE), formerly the Ministry of Environmental Protection (MEP), is in charge of both policies and enforcement of laws and regulations in its field. The National Development and Reform Commission has broad control functions over the Chinese economy. It monitors the performance of the economy, approves major construction projects, guides and promotes economic restructuring, and prepares national economic plans. The state-owned Assets Supervision and Administration Commission, subordinate to the State Council, supervises and manages large centrally-owned companies in various sectors, including iron and steel.

Export Policy In April 2016, following a complaint filed by the US with the World Trade Organisation, China agreed to put an end to the subsidies provided by the government for some metal products, including steel, exported to the US market. The subsidies were previously given to local and provincial governments, which in turn transferred them to businesses in the 179 industrial clusters across the country. These subsidies are estimated to have amounted to some USD 1bn over the course of more than three years.

To encourage steel exports, China’s MOF reduced export tariffs on some steel products effective from January 1, 2017. Stainless steel plate export tariffs were reduced from 10% to 5%, while steel billet tariffs were reduced from 15% to 10%. The export tariffs on steel wires, rods and bars were removed.

Supra-National Law The excess of steel capacity worldwide and cheap Chinese exports are the reasons for the antidumping and countervailing actions frequently taken by various countries against imports of steel products from China. According to Beijing Lange Steel Information Research Center, in 2018 a total of 36 investigations from 18 countries and regions were launched against imports of iron and steel products from China, including 13 antidumping, one countervailing and 15 combined (antidumping and countervailing) investigations. There were seven cases of imposition of safeguard measures, up by 80% over 2017. In 2018, the number of countries and regions launching investigations against imports of steel products from China increased by five, compared with 2017.

Source: SBB, China Daily, Metal Bulletin, Reuters, Lange Steel Information Research Center

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Government Policy (cont’d)

Overcapacity Reduction and Environmental Control

In response to the rapid growth of production capacity in the steel sector in China, a number of documents calling for capacity reduction have been issued by China’s government in the last few years. In February 2016, the State Council released a document titled Guidance on Solving Overcapacity in the Iron and Steel Industry. The main tasks included prohibiting new capacity, dissolving excess capacity, promoting technology upgrades and encouraging M&A in the sector. Crude steel capacity had to be reduced by 100mn to 150mn tonnes by 2020. According to CISA, China eliminated 150mn tonnes of steel capacity by the end of 2018, meeting the target ahead of time.

In February 2017, the MEP and several other ministries issued an action plan for air pollution control in Beijing, Tianjin and 26 smaller cities in the neighbouring provinces, according to which a number of small and inefficient polluting steel plants had to be closed. During the winter season from November 2017 to March 2018, the government ordered steel mills from selected cities in Hebei and Henan provinces to reduce output by 50%.

On January 8, 2018 the MIIT issued the Implementation of Capacity Replacement Measures in the Steel Industry, which stated that regardless of the nature of the construction project, as long as it involves the construction of iron or steel smelting equipment, only capacity replacement is allowed. In environmentally sensitive areas, such as Beijing-Tianjin-Hebei region, the Yangtze River Delta and the Pearl River Delta, steel plants are required to cut at least 1.25 tonnes of outdated capacity for every tonne of new capacity.

In September, 2018, the Ministry of Ecology and Environment (MEE), released the Action Plan for Comprehensive Management of Air Pollution During the 2018-2019 Winter Period in the Region of Beijing-Tianjin-Hebei and Neighbouring Areas, requiring that the average concentration of PM2.5 in this region falls by 3% y/y. Unlike before, the authorities imposed production curbs during the winter season based on the emission level at each steel mill.

In June 2018, the State Council released the Three-year Plan on Defending the Blue Sky, set to reduce pollution by cutting outdated production capacity in several heavy polluting sectors, including the iron and steel sector. The plan focuses on economic and industrial restructuring, which is of a key importance for pollution control in Beijing-Tianjin-Hebei cluster and the Yangtze River Delta region. According to the plan, the steel production capacity in China’s largest steelmaking province – Hebei – has to fall under 200mn tonnes by 2020. All steel enterprises, which are listed in the steel capacity elimination plan, shall phase out their sintering equipment, coke ovens and blast furnaces by 2020.

Source: The State Council of China, SBB, China Daily, Metal Bulletin, Reuters, Peterson Institute for International Economics

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Iron & Steel Plan 2016 – 2020

Comments

The MIIT issued The Iron and Steel Industry Adjustment and Upgrade Plan (2016-2020) in November 2016. The plan stipulates that the annual growth rate of the value added in the industry should rise to 6% in 2020 compared to 5.4% in 2015 and that the capacity utilisation rate should climb from 70% in 2015 to 80% in 2020. In addition, the largest ten producers in the sector are to have a 60% share in 2020, compared to just 34.2% in 2015. This is to be achieved by encouraging M&As in the sector and by slashing new investments that would increase capacity.

According to Beijing Lange Steel Information Research Center, at the end of 2017 the share of China’s top ten iron and steel producers in the sector in terms of steel output was just 37%, which is still far below the target set for 2020. In 2018, the capacity utilisation rate in China’s ferrous metal smelting and pressing sector reached 78%, compared to 76% in 2017.

Under the plan, China’s crude steel capacity was to be reduced by 150mn tonnes by 2020, a target previously specified in the State Council’s Guidance on Solving Overcapacity, which has been already achieved at the end of 2018. Crude steel consumption in China is expected to be 650mn-700mn tonnes by 2020, compared to production in the range of 750mn-800mn tonnes. The Steel Plan also aims to increase product quality in the industry and foreign companies will be encouraged to participate through equity sharing and investment to promote higher value-added products and better management practices. The steel industry must reduce its energy consumption by 10%, according to the Steel Plan, while emissions of major pollutants must be reduced by 15% over the period. Energy consumption and pollutant emissions are to conform to national standards by 2020.

The plan also aims to increase product quality in the sector by encouraging foreign companies to participate through equity sharing and investment, and promote higher value-added products and better management practices. The steel industry should reduce its energy consumption by 10% and major pollutants should be reduced by 15% over the period. Energy consumption and pollutant emissions should conform to national standards by 2020.

Source: King & Spalding China Subsidy Law Exchange, The State Council of China, China Daily, Beijing Lange Steel Information Research Center CHINA IRON AND STEEL SECTOR 2019 Q1 45 An EMIS Insights Industry Report CHINA IRON AND STEEL SECTOR 2019 Q1 An EMIS Insights Industry Report CONTENTS

06 STEEL PRODUCTION

FOCUS POINT

Steel Products Output by Region, 2018

389.9 (35.3%) 87.6 North (7.9%) Northeast • 33.8%

40 (3.6%) Northwest

169.1 (15.3%) 65.8 South Central (6.0%) 353 Southwest (31.9%) East

Source: CISA, CEIC

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Highlights

Overview

The steel manufacturing sector is a driving force for China’s economy growth. Steel products are widely used in various sectors, such as infrastructure and building construction, and the automotive, machinery and home appliance manufacturing sectors. China is the world’s largest producer, consumer and exporter of steel products. According to the latest data from the World Steel Association, China consumed nearly 737mn tonnes of steel products in 2017, which gave it a 46.4% share of the world’s total apparent steel consumption.

Challenges In recent years, China’s steel manufacturing sector has been facing a number of challenges, in the context of the country's shift from an investment-driven to a consumption-driven economy. The sector is characterised by low levels of concentration, fierce competition and severe overcapacity, as well as a relatively low level of technological innovation. There are a large number of small, inefficient steel producers that are using backward capacity to produce low-end products. The government is initiating regular campaigns to inspect such companies and order them either to adopt corrective measures and upgrade their technology, or to shut down. Another challenge that Chinese steel companies face is the rising number of trade cases brought against China for steel product dumping. It creates difficulties to the exports of steel products.

Outlook Although that the target of cutting 150mn tonnes of crude steel capacity in the 2016–2020 period was met by the end of 2018, the government is expected to continue to adopt strict measures for control over new capacity additions and outdated technologies elimination. According to the new policy released by the MIIT in 2018, steel smelters are allowed to add new steel capacity only for capacity replacement projects. In 2018 Chinese government introduced a new model of production curbs during the 2018-2019 winter season. It was based on the emission level at each steel mill – a measure that is expected to be more effective. The government will continue to encourage M&A activity in the sector, providing support to the ten largest steel producers as it aims to consolidate 60% of the sector in their hands by 2020. More relaxed regulations for foreign investment in the steel sector are expected to increase the number of foreign players in it, which will accelerate technological exchange and improve the sector’s competitiveness on the global market. At the same time, China’s government encourages still enterprises to invest overseas in order to improve their access to foreign markets.

Source: CISA, CEIC, China Daily

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Main Events

§ In January 2018 Four Rivers Investment Management Co Ltd (Four Rivers), a joint venture (JV) between the US-based investment company WL Ross & Co LLC and China BaoWu Steel Group Co Ltd, completed a comprehensive restructuring and recapitalisation of Chongqing Iron and Steel Co Ltd (Chongqing Steel). Chongqing Steel operates 8mn tpa of steel production capacity, supplying long products, hot-rolled coils and plates for the construction, infrastructure, shipbuilding and automotive sectors. As part of the restructuring, Chongqing Steel has reduced its debt burden from approximately RMB 20bn to RMB3.5bn and eliminated additional RMB 20bn in other liabilities. Following the successful restructuring and recapitalisation, Four Rivers acquired 23.5% stake in Chongqing Steel.

§ In July 2018, Angang Steel Co Ltd, China's fourth-largest listed steel company in terms of crude steel output, announced that it plans to acquire a 100% stake in its rival Chaoyang Iron and Steel Co Ltd for RMB 5.9bn. Ansteel Group, which is the controlling shareholder of both companies, agreed to the deal stating that it will reduce horizontal competition between them.

§ As of January 16, 2019, a total of 11 steel enterprises were removed from the list of steel producers approved by the government and closed operations after in December 2018 the Ministry of Industry and Information Technology (MIIT) found out that they had added new capacity without permission. Another 17 enterprises were ordered to correct issues related to environmental protection and safety. Among them was Jiangsu Shagang Group, a subsidiary of China's largest steel enterprise, China Baowu Iron and Steel Group.

§ In the end of January 2019, Tianjin Higher People’s Court approved a plan for reorganisation of Bohai Steel Group – one of the largest steel companies in China, which in 2015 was capable of producing 22mn tpa of steel products. Following years of overexpansion, in 2016 the company had fallen into a debt crisis and was ordered to cut capacity by almost 70%. By the end of April 2018, Bohai Steel and its subsidiaries had RMB 243bn of unpaid debts with only RMB 115bn of total assets. Under the reorganization plan, the assets of Bohai Steel will be divided into two parts — 17 companies with core steel business assets worth RMB 58.4bn and 31 companies with non-core assets. Bohai Steel plans to sell part of its core business assets to the Chinese steel company Tangshan Delong Steel Co Ltd, which will invest RMB 20bn in it, including RMB 16bn to repay debts and RMB 4bn to support business operations. Tangshan Delong plans to list Bohai Steel on the stock market by 2023.

Source: China Daily, MIIT, Xinhua, Caixin

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Subsector Statistics

Steel Products Output Steel Products Sales Volume

1,138 1,102 1,126 1,123 1,106 1,094 1,100 1,090 5.4% 5.5% 5.5% 5.7%

1.3% 0.6% -0.2% 1,048 -0.7% 1,031

-6.3% -7.9%

2014 2015 2016 2017 2018 2014 2015 2016 2017 2018

Production, mn tonnes y/y change, % Sales, mn tonnes y/y change, %

External Trade Value, USD mn External Trade Volume, thou tonnes 17,923 112,405 70,842 108,990 16,443 15,172 14,336 93,790 62,844 13,153 60,894 55,244 14,433 54,682 13,210 13,300 12,785 13,166 75,630 69,538

2014 2015 2016 2017 2018 2014 2015 2016 2017 2018

Ex ports Imports Ex ports Imports

Comments In 2018, China produced 1,106mn tonnes of steel products and sold 1,090mn tonnes, up by 5.5% y/y and 5.7% y/y, respectively. The robust demand for steel on the domestic market, along with the rising steel prices, were the main factors behind the growth in steel products output. Stable demand during the first ten months of the year reduced the steel producers’ willingness to export. On the other hand, the rising protectionism of some of the major steel consuming countries and regions, such as the US and the EU, created challenges for China’s exports. Exports of steel products dropped by 8.1% y/y to 69.5mn tonnes, while imports fell by 1% y/y to 13.2mn tonnes, due to increased domestic production. According to the MIIT, in 2018 China’s average export price of steel products rose by 17.2% y/y to 5,747 RMB/tonne, while the average import price increased by 6.5% y/y to 8,225 RMB/tonne.

Source: CISA, GAC, CEIC, MIIT

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Subsector Statistics (cont’d)

Comments In 2018 China’s iron and steel metal smelting and pressing sector reported a positive performance, driven by the government-led supply-side structural reforms, more stringent environmental control over steel production, strong market demand and high steel product prices. According to the NBS data, the sector’s sales revenue surged by 15% y/y to RMB 6.4tn, of which RMB 4.1tn came from large and medium iron and steel enterprises. The sector witnessed an all-time high in profit growth, with total profit reaching RMB 403bn, up by 37.8% y/y. Encouraged by firm demand and high steel prices, China’s steel mills worked at elevated capacity. In 2018 steel production capacity utilisation rate reached 78%, up by 2 pp over 2017. As a result of the government’s efforts to increase the sector’s consolidation by M&As promotion and closure of substandard still producing companies, the number of enterprises operating in the sector shrank to 5,138 at the end of 2018, compared to 7,712 at the end of 2017. Due to high profitability, the number of loss-making enterprises remained almost flat, compared to 2017. Main Indicators

2015 2016 2017 2018 Number of Enterprises 9,540 8,498 7,712 5,138 Number of Loss-Making Enterprises 1,917 1,448 1,101 1,100 Sales Revenue, RMB bn 6,362 5,510 5,567 6,401 Cost of Sales, RMB bn 5,946 5,046 4,980 5,685 Total Profit, RMB bn 50 145 292 403 Product Inventory, period-end, RMB bn 246 255 231 230

Source: NBS

5,138 1,100 78% Production Enterprises Loss-Making Capacity Utilisation Enterprises Rate

Source: CISA, NBS

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Subsector Statistics (cont’d)

Steel Output by Product, thou tonnes

2014 2015 2016 2017 2018

Bar 215,277 204,306 200,806 199,977 209,610

Medium Thick Wide Strip 123,008 123,348 131,885 137,796 154,553

Wire Rod 153,832 147,233 142,188 129,734 144,488

Rod 79,418 71,310 70,962 68,067 72,481

Hot Rolled Thin Wide Strip 52,968 54,175 57,815 54,911 68,159

Cold Rolled Thin Wide Strip 42,596 45,608 53,787 52,708 53,115

Plated Sheet, Plate, Strip 50,749 52,101 59,360 52,630 49,509

Welded Tube & Pipe 57,611 69,695 70,164 53,171 48,372

Medium & Small Section 56,198 56,604 51,593 46,128 48,299

Hot Rolled Narrow Strip 59,592 63,632 65,781 44,596 44,935

Medium Plate 40,009 40,199 35,987 35,706 38,117

Cold Rolled Sheet 37,100 38,208 38,589 32,773 30,034

Heavy Plate 26,385 25,425 25,539 26,086 29,561

Other Products 35,290 37,984 35,915 25,859 25,533

Seamless Tube & Pipe 31,369 28,577 27,434 26,101 24,829

Large Section 13,494 14,357 15,517 14,607 16,165

Hot Rolled Sheet 8,158 7,776 11,406 9,909 10,425

Electrical Steel Sheet, Plate, Strip 8,852 8,809 9,041 10,202 9,811

Ultra Heavy Plate 7,270 7,705 7,665 7,297 8,179

Coated Sheet, Plate, Strip 8,252 8,099 8,710 7,777 7,325

Cold Rolled Narrow Strip 12,487 13,507 13,294 8,642 7,152

Steel for Railway Use 5,654 4,838 4,576 4,786 4,865

Source: CISA, CEIC

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