Steel production has always been as much about knowing your market and associated logistics as it has been about production capacity. Although Longhai Steel’s advanced production technologies and associated efficiencies give the company a decided edge in the marketplace, the fact that the company is located in Hebei province, China’s biggest steel and steel wire producing area, has played a beneficial role. Nearly half of China’s steel consumption comes from construction, and Hebei province, surrounding Beijing, is located near the country’s eastern coast where construction and associated manufacturers and distributors are concentrated. With a solid in-place infrastructure and network of industry elements, logistics is optimized.
Hebei’s rich assortment of distributors minimizes transportation issues. Longhai’s high quality steel wire is sold through private distributors and trading companies to third-party processors, with fully 80% of it in Hebei. Close relationships with key distributors have meant economically beneficial terms for Longhai, where on-demand manufacturing payments are collected in advance, allowing the company to finance the purchase of raw materials and reduce accounts receivable. Over half of the company’s sales dollars come from its top 5 customers.
In addition, an advantage to Longhai being proximate to other steel producers is the increased potential for acquisition. China’s steel industry is highly fragmented, a product of the industry’s rapid development. There are numerous small-scale operators, lacking the capital to expand, resulting in industry-wide duplication and inefficiencies. A major consolidation move is now underway, a government effort to reduce obsolete capacity, drive cost reductions, and increase energy efficiency. Longhai continues to actively identify and acquire modern, high-quality producers at low valuations, and plans to expand its operations and sales by acquiring steel wire producers with production facilities near its current facilities, of which there are plenty.
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