“The steel industry is struggling, yet Baosteel's ten-million-ton Zhanjiang project is in the midst of full-scale construction.” Sheng Genghong, general manager of Baosteel Zhanjiang Iron & Steel, addressed this contradiction head-on in a recent interview.

The Zhanjiang project is an exploration by China's steel industry of industrial adjustment through a “linkage of capacity increases and reductions.” As the steel industry endures a “winter” of overcapacity, falling steel prices and sustained wafer-thin margins across the sector, the industry is paying close attention to issues such as the project's construction progress, “de-homogenization,” and post-production profitability. Baosteel has now responded.

The industry once believed that, given the steel sector's “poor overall environment,” the construction and commissioning period of the Baosteel Zhanjiang project would likely be delayed.

Baosteel officials made clear that after piling began in May 2012, the Zhanjiang project went through a year of plan adjustments and has now smoothly entered full-scale construction. A blast furnace with an inner volume of 5,050 cubic meters will be officially commissioned in 2015, in line with the original construction schedule. Cold-rolling and hot-rolling lines will be commissioned in 2016, and if progress goes smoothly, commissioning could even be brought forward.

Sheng Genghong disclosed that because of major changes in the overall market environment, Baosteel optimized and adjusted the construction plan. At present, investment in each unit is at a relatively low level compared with similar domestic projects. This means “the future depreciation cost of Zhanjiang Steel will be greatly reduced.”

The market is currently “forcing” the steel industry to adjust. The industry had previously worried whether building another ten-million-ton mega-project like Zhanjiang Steel in an already oversupplied steel sector would mean “more on top of more, surplus upon surplus.”

Baosteel officials responded clearly that Zhanjiang Steel's “increase” is premised on “reduction.” During the “11th Five-Year Plan” period, Guangdong fully shut down and eliminated more than 11.64 million tons of outdated steel capacity. At the same time, Baosteel has completed the substantive restructuring of Shaoguan Steel.

Upgrading the product mix and target markets in tandem is the substantive step toward “de-homogenization.” It is understood that, in response to the upgrading trend in manufacturing such as automobiles and home appliances in the South China market, Zhanjiang Steel's product mix is positioned at the “high-grade” end of quality carbon steel plate products such as hot-rolled sheet, cold-rolled sheet, hot-dip galvanized sheet and wide-heavy plate.

The industry has long worried whether the Baosteel Zhanjiang project, even if smoothly commissioned in such a “big market,” can “smoothly generate profits”? Will it “lose money as soon as it starts production”?

Baosteel Zhanjiang Iron & Steel officials this time “laid their cards on the table” to reporters: at present, profitability assessments rely mainly on two “low-cost” factors. First, the combination of resources and markets at the “shortest distance,” breaking the long-standing layout drawback of China's steel industry in which “northern steel is shipped south.” The Zhanjiang project directly serves the South China market and is also close to the Southeast Asian market, giving it clear advantages in finished-product sales logistics costs and transport costs for exports to Southeast Asia. Second, it takes a “shortcut” in the current overall pattern of imported iron ore being “shipped south and then north, or east and then west,” reducing raw material costs. Zhanjiang Steel has a 300,000-ton berth connected to the main navigation channel, so whether the ore comes from Brazil or Australia, shipping distances are greatly shortened and no second transshipment is needed.

Industry experts believe that the Zhanjiang Steel project and Baosteel Co., Ltd. have formed an integrated framework of “one plant managing one plant, one department managing one department,” creating synergy and complementarity that ensures the new project reaches design capacity, standards and efficiency quickly and rapidly builds up its viability.