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RR RUEHCN RUEHGH
DE RUEHBJ #8615/01 1300759
ZNR UUUUU ZZH
R 100759Z MAY 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 4801
INFO RUEHCN/AMCONSUL CHENGDU 6204
RUEHGZ/AMCONSUL GUANGZHOU 0436
RUEHGH/AMCONSUL SHANGHAI 4472
RUEHSH/AMCONSUL SHENYANG 6011
RUEHHK/AMCONSUL HONG KONG 7339
RUEHIN/AIT TAIPEI 5518
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHGV/USMISSION GENEVA 1035
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 05 BEIJING 008615 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EB/TPP/BTA, AND EB/IFD/OIA 
STATE PASS USTR FOR STRATFORD/WELLER/KEMP 
TREASURY FOR OASIA/ISA 
USDOC FOR 5101/ITA/IA 
USDOC FOR 4220/ITA/MAC 
USDOC FOR 1003/ITA/OUS 
USDOC FOR 6310/ITA/TD/OIEM 
 
E.O. 12958: N/A 
TAGS: ECON EIND ENRG ELAB SENV WTRO CH
SUBJECT: SHIGANG AND HANGANG:  A TALE OF TWO HEBEI 
STEEL MILLS (corrected copy) 
 
 
¶1. (SBU) Summary.  Recent visits to two Hebei Province 
steel mills provide an insightful look into how steel 
industry reforms in China will play out during the 
next several years. Handan Iron and Steel Group 
Company, a large state-owned steel mill, has been 
selected by the Central Government to become one of 
the flagship steel producers in China and has been 
authorized to triple its production capacity even as 
government authorities seek to reduce China's overall 
capacity by some 100 million metric tons.  In stark 
contrast, Shijiazhuang Iron and Steel Company, a 
former state-owned steel mill that is now largely 
privately held, is seeking to gain access to new 
markets by improving its product line and targeting 
niche segments of the market rather than through 
adding new production capacity. 
Despite these differences, both enterprises 
say they are fully committed to meeting new government 
environmental and energy conservation guidelines and 
recognize that failure to do so could result in stiff 
fines or public humiliation.  The Hebei steel 
enterprises also provide a proxy to understand the 
different paths private and large state-owned 
enterprises will take in the coming years as China 
deepens reforms of its industrial base.  End Summary. 
 
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Same Harmonious Society Destination, But Different 
Starting Points 
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¶2. (SBU)   Handan Iron and Steel Group Company, Ltd. 
(Hangang) President of the Board of Directors Liu 
Rujun said that Hangang, located in the south Hebei 
Province industrial city of Handan, has some 25,000 
employees who are on track to produce eight million 
metric tons of steel in 2006.  Hangang's production 
will consist of six million metric tons of sheet and 
plate products, 1.3 million metric tons of cold rolled 
plate, and 700,000 metric tons of other steel 
products. President Liu said that the enterprise is 
building a new mill which will add five million metric 
tons of capacity by 2007, and in conjunction with the 
elimination of around three million metric tons of 
outdated production, will lift the enterprise's 
steelmaking capacity to 10 million metric tons. 
Hangang is transitioning from being a low-value 
producer oriented toward supporting the construction 
industry to become a high-value mill making products 
such as sheets and plates for the electronics 
industry, according to President Liu. 
 
¶3. (SBU) President Liu stated that Hangang is a key 
player in Hebei Province's steel industry 
reorganization.   Hebei Province, working with the 
National Development and Reform Commission (NDRC), has 
ordered the consolidation of the steel industry in 
Hebei.  This will result in the creation of two large 
state-owned steel enterprises, Tangshan in north Hebei 
with an approved production capacity of 40 million 
metric tons, and Hangang in south Hebei with 30 
million metric tons of approved capacity.  The goal of 
the consolidation is to promote the rapid assimilation 
of international steel production technology and to 
foster more internationally competitive enterprises, 
according to President Liu.  Hangang is currently 
negotiating joint venture (JV) agreements with two 
private steel mills in south Hebei as a part of the 
consolidation initiative. 
 
¶4. (SBU) Standing in stark contrast to Hangang is 
 
BEIJING 00008615  002 OF 005 
 
 
Shijiazhuang Iron and Steel Company, Ltd. (Shigang) 
located in Hebei Province's capital city of 
Shijiazhuang. Yan Shengke, President and Chairman of 
the Board of Directors of Shigang, stated that his 
company's workforce of 4,000 employees annually 
produce around 2 million metric tons of steel. 
Shigang is a specialty steel maker seeking to become a 
leading Chinese producer of steel products used in 
various stages of automobile manufacturing.  President 
Yan said that Shigang served as an early evaluative 
state-owned enterprise (SOE) reform model, with 
private investors being allowed to purchase a majority 
share of the company.  Although U.S. investors 
expressed an interest in purchasing Shigang, CITIC 
Hong Kong ultimately purchased a majority 65 percent 
share in the company while Hebei Province retained a 
20 percent stake and Shigang management and employees 
received a 15 percent interest. 
 
¶5. (SBU) President Yan stated that ownership reform 
went beyond a simple change in leadership.  Shigang 
now has more market responsive decision-making powers 
and control over capital, freeing itself from the 
tight bureaucratic control it experienced while 
government owned.  The reform also has resulted in 
Shigang possessing a strategic partner committed to 
developing a strong presence in China's specialty 
steel sector.   CITIC owns controlling stakes in 
specialty steel mills in Jiangsu and in Hubei 
Provinces and President Yan stated that he developed a 
plan under review by the Ministry of Commerce (MOFCOM) 
that would create a JV between Shigang and the other 
CITIC-controlled specialty steel makers.  The JV would 
create the largest specialty steel producer in China 
and should promote better natural and human resource 
allocation by the enterprises, according to President 
Yan. 
 
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SOE Reform With Hebei Steel Mill Characteristics 
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¶6. (SBU) President Yan said that Shigang was an early 
leader in other SOE reforms arenas, most notably the 
separation of social services, such as schools and 
security forces, from its core business functions. 
Shigang began the separation of social services in 
1993, with the process culminating four years later in 
the final transfer of most of the previously Shigang- 
provided social services and associated employees to 
the local Shijiazhuang and Hebei Provincial 
governments for absorption and administration.  A 
notable exception was Shigang's hospital that is still 
owned and operated by the company.   President Yan 
said that Shigang has teamed with a U.S. health care 
company to create a joint venture hospital and 
outpatient clinic that will compete in the local 
health care market by offering basic health care and 
pharmaceutical services along with medical exams and 
testing. 
 
¶7. (SBU) President Yan said that Shigang formed and 
separated five subsidiary companies and some 3,200 
employees as a part of its SOE reform efforts. Shigang 
kept the companies, mainly made up of functional 
services such as transportation and maintenance, under 
its corporate umbrella for three years after their 
formation to ensure they were well matured before 
release into the market.  President Yan stated that he 
believes this strategy accounts for the apparent 
success of these new companies and for the willingness 
 
BEIJING 00008615  003 OF 005 
 
 
of the companies employees to separate from a parent 
company where many had worked for years.  President 
Yan also highlighted other measures Shigang has taken 
to become a more market-based enterprise, including 
the establishment of  a compensation fund created by a 
regular draw on the companies net profits designed to 
provide employees basic financial resources should the 
enterprise undergo downsizing in the future. 
 
¶8. (SBU) President Liu said that Hangang also has 
completed its SOE reform obligations by separating its 
social functions and non-core businesses.  Hangang 
completed the transfer of its social services 
including its hospital, schools and security service 
to the local government in 2004. They completed the 
transfer of several independent companies away from 
the core business areas in 2005.  There were no laid 
off workers as a result of this separation, according 
to President Liu.  The company spin-off effort 
affected approximately 5,000 workers, reducing 
Hangang's workforce to its current 25,000 thousand 
employees.  President Liu estimates that some five 
thousand workers could be further trimmed from the 
company rolls to fall more in line with international 
competitors, but presently there are no plans to take 
such a step. 
 
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Burning to Conserve Energy, Save Environment 
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¶9. (SBU) Turning his attention to environmental and 
energy conservation issues, President Liu stated that 
the NDRC has identified Hangang as a leader in the 
Chinese Government's effort to promote more 
environmentally friendly steel production.  The NDRC 
intends to use the environmental and energy 
conservation measures listed in its 2005 Steel Policy 
to eliminate steel enterprises that waste water, 
power, and other resources.  President Liu said 
Hangang is under enormous pressure to meet government 
set environmental and energy efficiency targets.  To 
that end, Hangang expects to be able to self-generate 
approximately 40 percent of its needed power by the 
end of the Eleventh Five Year Plan through the 
harnessing and recycling of waste gases.  Hangang also 
has set a target for water savings that includes a 
goal of using less than five tons of water per one ton 
of produced steel. 
 
¶10. (SBU) President Liu said that the Central 
Government now requires steel SOE's to open their 
resource consumption and environmental statistics to 
the public so that their compliance can be monitored. 
Steel SOE's found to be wasting energy or polluting 
will have their infractions announced on local 
television and subsequently, the infringing SOE leader 
will be required to go on television to explain his 
enterprise's failure.  In a complementary local 
initiative, President Liu stated that the Hebei 
Provincial Government has erected environmental 
monitoring equipment surrounding Hangang. The 
enterprise will have to pay a high penalty to the 
local and provincial governments if it is found to be 
polluting.   President Liu said that Hangang is 
working hard to comply to the new environmental and 
energy standards because as a large SOE, it has a 
governmental function as well as its business role and 
should be expected to be a leader in Central 
Government mandated initiatives. 
 
 
BEIJING 00008615  004 OF 005 
 
 
¶11. (SBU) Shigang President Yan said that he and his 
staff realized more than ten years ago that his 
enterprise's location seven kilometers from downtown 
Shijiazhuang and only 500 meters away from a major 
residential area made environmental protection key to 
the enterprise's long-term survival.  This realization 
led to the enterprise's strategy of growing its 
business by producing specialty steel rather than 
seeking to grow through increased production.  Shigang 
during the past decade has also invested some 1.3 
billion RMB (USD 162 million) in environmental 
protection measures, according to President Yan.   The 
investment included the installation of what President 
Yan said was the first acid rain prevention equipment 
in the Chinese steel industry. 
 
¶12. (SBU) President Yan stated that Shigang is aware 
that the Central Government will be closely 
monitoring, and possibly eliminating, high polluting 
and energy-consuming enterprises. Hebei provincial 
authorities also are on the look out to find sulfur 
dioxide producers and water polluters, and toward that 
end, have established 24-hour monitoring of Shigang's 
air pollution.  In order to motivate its employees to 
meet the new environmental protection standards, 
Shigang's policy is to remove 5,000 RMB from managers' 
bonuses if they are not meeting environmental targets. 
President Yan said that because of a water shortage in 
Hebei, Shigang is taking steps to reduce the amount of 
water it uses when producing steel.  Previously, 
Shigang consumed about six tons of water per ton of 
steel produced, but with recent advances the 
consumption has been reduced to 3.9 tons of water per 
ton of steel produced and the enterprise has a stated 
target of 2.7 tons of water per ton of steel produced. 
 
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Comment: Hebei Steel Mills As A Proxy For Steel 
Industry and Broader SOE 
Reform 
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¶13. (SBU) Shigang and Hangang provide an illuminating 
contrast of where steel industry and broader SOE 
reform is heading in China during the Eleventh Five 
Year Plan.  Hangang is in many ways unreconstructed in 
its view that as a large SOE it continues to perform 
both business and governmental roles, despite the 
recent shedding of some of the traditional SOE 
trappings such as its own school system and police 
force.  This outlook will inform its compliance and 
adherence to environmental and energy policies laid 
out in the Eleventh Five Year Plan.  It also will 
motivate its efforts to quickly achieve its authorized 
production capacity of 30 million tons through 
expanded production and acquisitions while 
concomitantly adding increasingly advanced steel 
making capabilities, a feat private enterprise would 
be hard pressed to match. 
 
¶14. (SBU) On the other hand, Shigang as a now largely 
private company recognizes that in order to survive it 
must establish a presence as a high-end producer 
tailoring its business to areas traditionally served 
by imported products and from there, make a move into 
the international market.  Shigang recognizes that 
mergers and acquisitions lay in its future, not as 
part of a government launched initiative to reform an 
industry, but rather as a means to improve its line of 
 
BEIJING 00008615  005 OF 005 
 
 
refined products and to more efficiently employ labor 
and capital. The survival and success of private 
enterprises like Shigang during the next five years 
will depend on their ability to accomplish this feat 
while staying one step ahead of government initiatives 
such as environmental protection and energy 
conservation measures laid out in the Eleventh Five 
Year Plan.  Failure to do so will probably lead to 
their being overrun, or absorbed, by large SOE's with 
a mandate to do so no matter the costs. 
 
RANDT