All indications are that China's economy is on the rebound, with consumption leading the way. The transition to a new government has been smooth and President Xi Jinping appears committed to implementing the stimulus programs announced by the prior administration, which mean hundreds of large-scale infrastructure projects are due to come online in 2013, and this bodes well for China's steel industry. While many of the country's larger manufacturers are private or state run, keep an eye on Sutor Technology Group Limited (SUTR), China Gerui Advanced Materials Group Limited (CHOP), China Industrial Steel Inc. (OTC:CDNN) and General Steel Holdings, Inc.(GSI). As I have previously discussed, these companies are turning to technology, specialty products, and strategic relationships to secure their foothold in China's domestic market and are well positioned to participate in the anticipated return to growth.
The Changing Steel Market
Steel has always been a critical element, or should I say alloy, in the building of modern economies. Dominated by the United Kingdom in the late 19th century and the United States in the 20th, the steel industry built the cities we all live in and the transportation systems that connect us domestically and abroad, not to mention considerable personal wealth. We have Andrew Carnegie, J.P. Morgan, Charles Schwab, et.al. (see Robber Barons) to thank for the formation of U.S. Steel (NYSE:X) in 1901, one of the earliest public vehicles allowing lesser known investors to participate in the industrialization of America.
The steel industry has seen a lot of changes since then; technological advances in metallurgy have resulted in lighter, stronger alloys, vastly expanding the applications for steel; improvements in the production process have considerably reduced the need for labor; and demand for steel has shifted from the U.S. and other mature markets to emerging economies.
These changes pose significant challenges for the steel industry in the U.S. and Europe. Some producers, such as U.S. Steel have managed to maintain a position, albeit a weaker one, in the global market, while others have simply gone by the wayside. Still others have found creative alternatives for their resources. I went to college in Bethlehem Pennsylvania, home to Bethlehem Steel, once the second largest steel company in the U.S. and remember well the smell of sulfur (and beer) gently wafting through the hills of Lehigh University. I was recently surprised to discover, that after declaring bankruptcy in 2001, the old Bethlehem Steel factory reopened as the Sands Casino Resort Bethlehem in 2009, which now includes a hotel and outlet mall, bringing traffic and jobs to the previously depressed community.
If this makes no other point, one thing is clear; Pennsylvania is no longer the epicenter of the world's steel production. Today, China leads the world in both the production and demand for steel, with India, Russia, South Korea, Brazil, and Turkey among the top ten manufacturers. The modern facilities in these countries are safer, cleaner and more cost efficient than older factories in the U.S., many of which had been operating since America's heyday, making them the markets to watch.
While each of these emerging economies offers significant opportunity for mid- and long- term investors, I believe China represents the low-hanging fruit; particularly as the Country's innate growth is nurtured by infrastructure-based government stimulus.
General Steel Holdings
There are several Chinese steel manufacturers that are publicly traded in the United States and investors hoping to participate in China's next economic wave should consider building a position in one or more of these companies. One in particular is General Steel Holdings. Here are few highlights:
- Located in Shaanxi Province, GSI has a foothold in Western China, where rebuilding following 2008 Wenchuan earthquake, and government-sponsored infrastructure projects continue to fuel demand for steel.
- The Company has demonstrated its ability to supply materials for large infrastructure projects, including Xi'an subway lines, high speed railway Zhengxi and Xicheng lines and Three Gorges Hydropower Station.
- Working through five joint ventures/subsidiaries, GSI continues to build relationships with raw material suppliers, distribution networks and direct sales outlets. Its Longmen Joint Venture contributed $1.86 billion in revenue on sales volume of 3.5 million metric tons,
- Construction to begin on a state-of-the-art, 900,000 metric ton seismic-grade rebar production line. Once completed, this production line is expected to reduce GSI's rebar production costs by approximately RMB100 per metric ton.
Earlier this year the Company announced it had reassessed its accounting treatment with regard to certain aspects of its collaboration with its joint venture partner, Shaanxi Steel, for the period from June 2009 to December 2010, and that it would be restating its financials for that period, without material impact to revenue or cash balances. The Company has made every effort to remedy the situation. Management has communicated regularly with the market and investors, brought Price Waterhouse on board as auditor, and was granted a filing extension from the NYSE. By August, GSI had filed revised financials for 2009, 2010 and first quarter 2011 financial results, and expects to fully cure its accounting issues by February 2013.
On September 27, the Company announced preliminary financial results for the first half of 2012 and provided an update on its operations and strategic initiatives, expecting to report revenues of approximately $1.4 billion and production volume of approximately 2.4 million metric tons.
With a population of more than 1.3 billion and a per capita GDP of only approximately $5,000, China's path to becoming the world's largest economy is well lit; in keeping with the trailing indicator theory, look to China's steel manufacturers to thrive as its economy picks up speed.
One company worth investigating is General Steel Holdings. Selling at or around $1.15 (November 27, 2012), GSI has a market cap just over $63 million, and is well off its $15.50 peak prior to the global economic downturn. Management is expecting to report revenue of $1.4 billion for the first half of 2012, and GSI is well positioned to continue this trend going forward. The Company is not currently profitable, however I believe that management's work in the face of a weakened economy will payoff next year, and I am looking to see GSI return to breakeven by the end of 2013. Investors looking for a long term play on China's growth should take a real look at the GSI.
Investing in companies in emerging markets, including China, is not suitable for all investors, and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risk.
The companies mentioned here are listed on Nasdaq and the NYSE but have operations based in China. They are all U.S. reporting issuers, and subject to the reporting requirements of the U.S. Securities and Exchange Commission, so U.S. transparency and disclosure is available to investors.