Home 
Publications Catalog Online Publications ADB Review Article
People’s Republic of China
|
LAIWU, PEOPLE’S REPUBLIC OF CHINA
Back in 1992, the Laiwu Iron and Steel Company (LSC) was a relatively small operation, producing low-quality products for the local market in the People’s Republic of China (PRC).
Now a little more than 10 years later, after receiving assistance from the Asian Development Bank (ADB), it is the country’s 12th largest steel-producing company and a world leader in high-quality construction products.
The transformation provides a model for reform and privatization of the PRC’s state-owned enterprises (SOEs) and modernization of the steel industry.
It has also proven a shot in the arm for the Laiwu region, in the eastern province of Shandong, which in 1992 was poor and in need of modernization.
The origins of the project date back to the mid-1980s when, during ADB’s first country programming mission, the Government requested assistance for a pilot project to expand and modernize an iron and steel complex.
“Because it was close to abundant natural resources and growing local markets, Laiwu was chosen as the most suitable plant for development,” explains Richard Simpson, an ADB Principal Evaluation Specialist.
A $133 million loan with a complementary technical assistance grant was approved in March 1992 to reform and restructure the steel plant and expand an existing iron and steel mill. The project marked the first steel plant to be financed by ADB, chosen because of its potential to reform the sector by introducing best practices and modern management programs.
The total project cost at appraisal was $328 million, financed by the ADB loan with cofinancing from the Export-Import Bank of Japan, a complementary loan from commercial sources, loans from domestic banks, equity from the province, and the company’s internal resources.
But the project was not commissioned until June 1999, 39 months behind schedule and with a $190 million cost overrun. Behind the delay and increased cost was a major change in one of the project components.
“It became apparent that there was already a glut of welded pipes in the domestic market. So the planned welded pipe mill became financially and econo-mically unviable,” explains Don Jacobson, an international steel expert and ADB consultant.
“An alternative had to be found to utilize the raw steel that would be produced from the expanded steelmaking facilities at Laiwu.”
Officials estimate that the project created about 10,000 new jobs in the region
After extensive technical and market research, it was decided to substitute a mill that would make high value-added steel for the construction industry, for which a ready domestic market was projected.
This, however, came at a higher cost because of more expensive equipment and extensive upgrading of facilities. Additional civil works, high domestic inflation, and increased staff costs due to the delay were other factors in the cost overrun.
The change of scope proved to be fortunate, though.
“One of the ‘secrets’ of LSC’s success has been its recognition of the need to focus on a growth market where there were few competitors, in this case larger structural steel sections, and serve that market exceptionally well,” says Mr. Jacobson.
“Without the project, as it now stands, the company probably would not have survived,” Mr. Simpson adds. “It was able to foresee the rapid changes in the construction industry, and adapt its strategy accordingly.”
Output at the plant was increased from the original capacity of 240,000 tons per annum to about 628,000 tons per annum of finished steel products. The actual plant capacity was due to be about 2.8 million tons by the end of 2002, of which about 2.2 million tons will be produced by the project-related equipment.
As a result, Laiwu now dominates the PRC’s production of high-quality construction steel, and is a world leader in its field. Some 10% of production is exported to elsewhere in Asia, including Hong Kong, China; Japan; and Singapore.
“With the prospects of providing most of the construction steel needed to build facilities for the 2008 Beijing Olympic Games, Laiwu expects to be ranked among the top 50 international steel companies by 2005.”
Other benefits have included considerable energy savings, with coal gas consumption per ton of steel only about one third of that before the project. This has led to less noise, as well as less air and water pollution.
The savings have been achieved through continuous production processing, modern technology, recycling, reuse of waste gas, and cogeneration. These processes have since been adopted by other steel plants within the PRC.
The impact of such efficiencies goes beyond environmental improvement. The provincial labor department has estimated that per capita income in the region has tripled since the project began.
The company is the largest employer in Laiwu, the number of employees rising from 11,700 before the project in 1996 to 15,600 in 2002. Additionally, officials estimate that the project created about 10,000 new jobs in the region.
Equally dramatic has been the transformation in the Laiwu plant’s own corporate culture. The project has enabled it to function as a modern, publicly listed corporation—a first for a steel company in the PRC.
“One of the key objectives of the project was to introduce modern management practices into the company,” says Mr. Jacobson.
With ADB technical assistance, the plant was listed on the Shanghai Stock Exchange in 1997, when 18% of the shares were listed. Two further issues followed, which increased the public shareholding to 22%. The plant now operates in a free market, without subsidy or protection. It pays taxes and operates like a private company.
As it works toward consolidating its achievements and building better marketing and corporate governance, the plant is looking forward to forming a strategic partnership with a foreign company.
“In transforming a struggling SOE into a successful enterprise with a significant private sector shareholding, the project is seen by government agencies as a model that other SOEs could emulate,” Mr. Jacobson concludes.
“Its example will help promote the ongoing reform and restructuring program, not just in the iron and steel sector, but elsewhere in the economy.”
© 2008 Asian Development Bank Privacy | Terms of Use |
 Top of page |