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What would really forge the relationship between two countries that already refer to each other as iron brothers (or ba tie in mandarin)? A steel plant! Even better, a massive steel plant in the middle of nowhere! This is where things seem to be headed if BR Researchs market pulse is any guide.

For the last couple of months, word had been making rounds that Bao was coming. Now, following BR Researchs fact-finding mission to Gwadar last week, we have some concrete insight. Official documents made available to BR Research show that the Baowu Group (referred to as Bao here), the Chinese state-owned iron & steel manufacturer is planning to build not just an integrated steel plant in Gwadar, but much more (refer to the illustration). But first, lets briefly acquaint ourselves with Bao.

Operating over 10 steel plants in China, the Shanghai-based, state-owned China Baowu Steel Group Corporation is Chinas largest steel producer by both installed capacity and production. The super-scale, integrated-steelworks behemoth which is also referred to as the aircraft carrier of steel in China, having over 60 million ton capacity in place is the second-largest steel-maker in the world, second only to the European giant ArcelorMittal. The entity came into being after Baosteel Groups acquisition of Wuhan Iron and Steel Corporation a few months ago as part of Chinese governments SOE restructuring drive.

Even on its own, the Baosteel Group (sans Wuhan) has a formidable capacity of 35 million tons. Its main subsidiary, the Baoshan Iron and Steel Corporation had $34 billion in assets as of March 31, 2015. Back in CY14, it had operating revenues of $27 billion and net profit of $1.2 billion. Bao is the name that sets the trend in Chinas steel market. And Chinas steel appetite is still huge, despite recent economic slowdown.

Estimated at around 718 million tons in 2017, Chinas steel demand cannot be catered fully by even the worlds 25 largest steel producers put together. It suggests that scores of medium-to high-capacity producers help feed the local demand. As per a recent BMI Research estimate, Chinese crude steel production is expected stand at 825 million in 2017 about half of the global steel output. The whole Baowu group can take between 7 and 8 percent slice of the pie at home. The Chinese government is planning to cut domestic steel overcapacity by as much as 150 million tons by 2020. Baowu has also made some cuts recently.

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Now Bao is planning to set up a massive industrial park in Gwadar. The plans significance is magnified by the fact that it will be Baos first pure-Greenfield, non-JV manufacturing presence overseas. Bao does have international presence, mostly in Japan, Singapore, Germany, Brazil, and America it exported 2.35 million tons of steel products in 2014 but that presence is mostly meant for regional marketing and distribution of Baos steel products, not for manufacturing.

It must be mentioned here that Baos overseas planning, specifically in Pakistans context, is at least a decade old. Back in 2007, buoyed by Pakistans booming economy and favorable investment climate, Baosteel Group was reportedly interested in building a 0.3 million ton cold-rolled steel plant, in collaboration with Pakistans Sapphire Group. That plan didnt materialize. Now, reportedly, Sapphire Group may do it alone in Punjab. And Bao is heading to the Gwadar shore, having initially considered the Pakistan Steel Mills acquisition last year, a consideration that was at play back in 2006 and 2007, too.

A Greenfield investment on such a scale in a new city will augur well for both the city that will see massive steel consumption soon, and the investor who will add capacity over time and use Gwadar as its regional launch pad. While local private-sector steelmakers have been taking the demand projections seriously and expanding capacity, together they will still not be able to meet the projected demand, and so Bao investment should come just in time.

BR Research understands that while infrastructure development in Gwadar is currently in a nascent phase, over time the connectivity and utilities infrastructure will come online as CPEC projects pick up pace on the bays east and west of that pristine hammerhead. In any case, if Bao comes, it will install its own power plant, have its own desalination and water treatment facilities, and, use a jetty of its own, located across the Gwadar Port, to both receive and send its marine shipments.

Baos plan suggests that the project can supply excess water and power supplies to Gwadars planned residential and industrial neighborhoods. In essence, Gwadar Port, and by extension CPEC may depend on Bao more than Bao may need them. And if Gwadar is destined to become a mega city, Bao may be the one supplying much of the material for its rise.

But the planned investment is preconditioned on some issues where the federal and provincial governments will have to facilitate Bao. These include i) location of industrial park (including residential park) ii) relationship between Bao industrial park and the airport, iii) relationship between Bao residential park and the Gwadar city plan, iv) local railway and road plan, v) limestone and dolomite supplies, vi) water supply, vii) modalities for power supply to local grid, viii) local telecom facilities, and ix) ecological and environmental protection.

Bao seems serious. Faced with supply overhang in the Chinese market and environmental issues in a city like Shanghai, where Baos major production is currently based, the Gwadar investment can provide a sound base for overseas capacity expansion. Raw materials, such as iron ore and coking coal can be sourced from existing supply regions such as Brazil, South Africa and Australia. Baos output can feed not only the Pakistani market but also serve the Western Chinese regions, where infrastructural and industrial development is on Beijings high priority. Read this space for a follow-up on what Baos impending entry can mean for Pakistans domestic steelmakers.

Copyright Business Recorder, 2017

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