In the downturn years of overcapacity in the steel industry and industry-wide losses for steel enterprises, the “kiss for growth” Zhanjiang Steel project is in an awkward position. On the one hand, the Zhanjiang and Guangdong governments are mobilizing various forces in hopes of rapid construction; on the other hand, Baosteel is facing multiple practical considerations such as funding, profitability, and national strategic layout.

　　The truth behind the restart

　　On July 23, Baosteel Zhanjiang Steel's announcement of the “official start of the main project's steelmaking works” came from a several-hundred-word press release sent by its Corporate Culture Department to several media outlets in Guangzhou. The name of the department head, Wang Jianguo, was also credited by the media. The release stated that the Zhanjiang Steel steelmaking plant would build three 350-ton converters, five sets of secondary refining equipment, three sets of stirring desulfurization main units and auxiliary facilities. Converters #1 and #2 are scheduled to be completed and put into operation by the end of December 2015, and converter #3 by the end of September 2016.

　　Compared with the start announced on May 17, this widely reported start news did not include any on-site photos, and the news was not even posted on the news center of Baosteel Group's website. Comparing the content of the two releases from Baosteel, the “start” of the steelmaking works this time had already been included in the May 17 announcement of the “simultaneous start of the six major main projects of ironmaking, steelmaking, hot rolling, cold rolling, energy, and logistics, as well as public and auxiliary facilities”.

　　However, according to Mr. S, an informed source working at the Zhanjiang Steel project base, “there have never been large-scale construction teams or large numbers of workers this year.” In his memory, on May 17, only a few balloons with slogans were hung at the site, and two pile drivers, considered a sign of large-scale construction, had already appeared there in April.

　　The informed source told reporters that Longteng Logistics, which had ceased production since early last year, has now been dissolved. Starting in April, Longteng employees' wages were changed to be paid by Baosteel. “I heard the employees will be absorbed into Baosteel, but no formal labor contracts have been signed yet.”

　　Longteng Logistics was established in February 2007 as a joint venture by Baosteel, Shaoguan Steel, and Zhanjiang Port Group, with a total project investment of 2.5 billion yuan. Its main business was terminal transportation and pellet processing. At the time of its completion, it was called “the first pellet production line designed and built with an annual capacity of 5 million tons.” However, at the end of 2011, it ceased production due to severe losses. In July 2012, Zhanjiang Port Group listed its 8% equity for transfer at the Guangzhou Equity Exchange.

　　The informed source also told reporters that the power plant and another main supporting project, the deep-water port terminal, which started construction last year, are still under construction. “They have purchased some new equipment.” Last year, reporters learned on site that both supporting facilities were outsourced. At that time, a person from Chongqing in charge of on-site command at the terminal construction site told reporters that the project had been underway for more than two years and was expected to be completed by the end of the year, depending on Baosteel's progress control.

　　The game behind the “shutdown”

　　Since June, Baosteel has continuously posted news on its website about signing contracts for major equipment purchases for Zhanjiang Steel, such as the 2150 continuous casting equipment contract on July 12 and the 2030 cold rolling mill equipment contract on July 15. Many of the suppliers have long-standing cooperation with Baosteel. Equipment procurement for the Zhanjiang project only requires a purchase order. Baosteel's high-profile announcements are intended to show the outside world that the Zhanjiang project is advancing.

　　In response to questions about its “shutdown” and slowed progress, Baosteel replied that it is “optimizing the project construction plan and exploring management models to ensure the project's competitiveness.” In fact, Baosteel is also quietly compressing the total investment scale. According to a project progress report submitted by Zhanjiang Steel to the Key Project Office of the Zhanjiang Development and Reform Bureau, it completed an investment of 4.6 billion yuan in 2012 and is expected to invest 5.2 billion yuan in 2013, with a total investment of 63.5 billion yuan. Based on the proportion of investment scale, the total construction progress of Zhanjiang Steel in the first two years is less than one-sixth. The total investment has also decreased from the initial 140 billion yuan disclosed by Zhanjiang to nearly 70 billion yuan last year, and then to 63.5 billion yuan.

　　In contrast, the Zhanjiang and Guangdong governments have paid a lot to promote the approval of the Baosteel Zhanjiang project. Especially in Zhanjiang, behind the “kiss for growth” were years of efforts by several mayors. The local finances are already heavily burdened after land acquisition and infrastructure investment on Donghai Island. The Zhanjiang government hopes that the 100-million-ton steel project will be put into production as soon as possible to realize the expected boost of nearly 200 billion yuan to local GDP. After paying the price of losing two local flagship steel enterprises, Guangzhou Steel and Shaoguan Steel, the Guangdong provincial government also hopes that the blueprint of the Zhanjiang project becoming the flagship of Guangdong's steel industry will be realized soon.

　　However, as a central state-owned enterprise, Baosteel has gradually shaken off the shadow of local governments in the investment and operation of the Zhanjiang Steel project in its game with the two levels of local government in recent years. “In many games between local governments and central enterprises, it is often the local government that gives in in the end,” sighed an informed source who participated in the early restructuring of Guangdong's steel industry.

　　A Zhanjiang government official told reporters that they usually learn information from materials submitted by Baosteel, and the progress of the project depends entirely on Baosteel itself. The current situation of the Zhanjiang Steel project has left Zhanjiang facing many difficulties and dilemmas: local fiscal funds are tight, and debt repayment pressure has increased significantly; the local steel supporting project investment promotion team is facing difficulties, and even intended projects are slow to land; in addition, there are legacy issues such as employment and resettlement of local residents displaced for the base, which urgently need to be resolved only after the Zhanjiang Steel project is put into production.

　　The dilemma of coastal steel capacity

　　Five years ago, in 2008, the coastal steel strategy swept across China. Almost all coastal cities suitable for large projects were targeted by major steel companies, but today, these projects have met with mixed fortunes.

　　The Bayuquan project in Yingkou, which started production in 2008, is owned by Ansteel, which had previously suffered huge losses totaling more than 6 billion yuan for two consecutive years. Shougang Jingtang, which moved to Caofeidian in the same year, had accumulated huge losses of over 10 billion yuan for four consecutive years. Ansteel and Shougang's coastal projects both caught the tail end of the good market, while the Baosteel Zhanjiang project and Wuhan Steel's Fangchenggang project, which only received “birth permits” last year, are facing 200 million tons of overcapacity on one side and loss-ridden enterprises on the other.

　　When the coastal strategic layout encounters overall overcapacity, where should the two 10-million-ton-level high-quality steel bases, which are born at the wrong time, go? At one point, there were even concerns about unfinished projects and even talk of “land enclosure.” “These projects are all national key projects. The delay in construction is due to the current bad market, mainly involving the relocation of urban steel plants and capacity transfer, so there will be no unfinished projects,” Liu Xinwei, a steel analyst at Zhuochuang Information, told reporters.

　　Sun Jin, head of the publicity department of Wuhan Steel Group, told reporters, “The Fangchenggang base will start from the back end of the industrial chain, steel rolling. We are about to start now, and then push forward from the back end. The rolling production line will be put into operation first, one line at a time. The first line is expected to be put into operation in 2015.”

　　The board secretary's office of Baosteel Co., Ltd. emphasized to reporters, “We want to build the entire steel industry chain. It is unrealistic to start only from the back-end rolling. First, there is not enough hot metal available for purchase locally; second, the quality cannot meet the requirements. We are Guangdong's first modern high-quality steel base.”

　　At this time, Baosteel and Wuhan Steel, these two “fellow sufferers,” are staging a “left turn, right turn” plot, which also reflects the awkwardness of the entire steel industry.

　　“The industry is still in late autumn, but winter is not far away,” Liu Xinwei said. “Next, there may be a new wave of mergers and reorganizations. After restructuring, some outdated capacity will be eliminated, the imbalance in market supply will be improved, and the industry can gradually shake off the downturn and achieve development.”