China’s economy is currently growing at its lowest rate in the past 25 years. The Chinese central government has emphasized, in many occasions, structural economic adjustments including “cutting overcapacity, destocking, deleveraging, reducing corporate costs and shoring up weak spots”. Pursuant to the 13th Five Year Plan, among these mandates, cutting overcapacity is an important topic that was discussed in 2016. The Ministry of Industry and Information Technology of China has stated that cutting steel and coal production would be the first major item in their quest to cut overcapacity. Trimming steel overcapacity was also an item mentioned in the State Council’s recent “Guidance for the Steel Industry to Reduce Excess Capacity and Resolve Difficulties for Further Development”. According to the Guidance, China plans to cut its crude steel output between 100 to150 million tons within five years beginning 2016.
The Chinese government’s policies have affected not only most of the domestic steel corporations, but also steel trading companies.
Crownia Holdings Ltd, a Canadian company listed on the TSX Venture Exchange (symbol: CNH), is one of the businesses that have been affected. Crownia’s core business is international trading of specialty steel products manufactured in China. On October 28th, Crownia released its most recent annual report and showed a decline of its sales for the first time after strong sales growth in the last 2 fiscal years. According to the report, its sales growth rate was 51% in 2014, 48% in 2015, but has fallen to negative in 2016. We interviewed senior management of Crownia to learn more about the currentt environment for China’s steel industry and the company’s future plans.
Mr. Herrick Lau, CEO of Crownia, explained, “The global economic slowdown, China’s policy of reduction of domestic steel production and political unrest in the company’s strategic market, Turkey, have all contributed to the decline of Crownia’s business in 2016. Under the cloud of the global economic slowdown, many countries have been carrying out investigations on alleged dumping by Chinese steel companies. As a result, Crownia has experienced some difficulties in developing new clients internationally in the past year.”
“The Chinese government has announced new policies for trimming the production over-capacity in the country. This has played a major role in the fluctuation of domestic steel supplies.”
However, Mr. Lau is confident about the company’s future prospects. He further commented, “Our sub-par financial performance in 2016 will not likely continue in 2017. We are diversifying our businesses to explore online steel trading platform that can complement our traditional business.”
In fact, the company is also in the process of vertically integrating its upstream supply chain. Crownia recently signed a letter of intent to acquire Zhongwan Co. Ltd., currently its Crownia’s upstream supply agent involved in the trading business of customized steel products in China. Crownia’s management is also taking steps to transition itself to a newly integrated steel trading business model.
Pursuant to China’s recent “One Belt, One Road” policy, Crownia has plans to focus on emerging markets like Bangladesh and Pakistan. The company will set up an office in Bangladesh to build exposure in the Middle East and in Eastern European markets. Along with expansion into new emerging markets, Crownia also expects business in Turkey to stabilize in the near future.
Although the policies to reduce steel production in China have negatively affected the Chinese steel related businesses, Crownia has made strategic shifts in its business to better repositioning itself in today’s market. Mr. Lau summed it up, “The continued advancement of our business model transition will soon cancel out the adverse effects caused by Chinese government policies.”
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