CITIC Pacific is turning its attention to the mainland steel industry after withdrawing from the airline business through the sale of its 28.5 percent stake in Hong Kong operator Dragonair for US$256 million.

CITIC Pacific has reportedly won approval from the National Development and Reform Commission to acquire Shijiazhuang Iron and Steel Co Ltd, a special steel maker in North China's Hebei Province.

The special steel industry produces high-intensity steel for specific uses. Last November, CITIC Pacific announced it would purchase a 65 percent stake in the steel maker for 1.28 billion yuan (US$160 million). Shijiazhuang Iron and Steel is the country's top producer of automotive-use alloy steel. It is presently capable of producing 1.8 million tons of iron and 2.4 million tons of steel each year.

CITIC Pacific has registered a special steel group in Hong Kong, encompassing three other special steel makers acquired by the company in late 2004. They are Hubei Xin Yegang Co Ltd and the Shenzhen-listed Hubei Daye Special Steel Co Ltd, both from Central China's Hubei Province, as well as Jiangyin Xingcheng Steel Co, a special steel maker based in East China's Jiangsu Province.

The four acquisitions have made CITIC Pacific the largest special steel group on the mainland.

At its internal meeting earlier this year, Larry Yung, chairman of CITIC Pacific, said the company now regards the steel industry as being of equal importance to the property and power generation industries, while retreating from aviation formerly its core business. Yung said CITIC Pacific will not limit itself to special steel, but will also buy some general steel makers.

CITIC Pacific has started consolidating the marketing and sales forces of its acquisitions to improve synergy and avoid internal competition.

Last year, CITIC Pacific reported a net profit of HK$3.99 billion (US$511.5 million), of which HK$1.06 billion (US$135.9 million) came from the airline business, down from HK$1.4 billion (US$179.5 million) out of HK$3.5 billion (US$448.7 million) overall net profit in 2004.
 
Securities analysts say CITIC Pacific's focus on the special steel market makes good business sense.
 
Fu Hung-man, director of Polaris Securities, said CITIC Pacific's move to consolidate its core businesses of steel making and property was a positive one.

"The company's business was too diverse, making it difficult to maintain a competitive advantage," he said.

He said CITIC Pacific's decision to expand its steel making presence was a wise one, given the high demand for steel on the mainland.

Zhou Xizeng, an analyst from CITIC Securities, was also upbeat about the special steel market, saying demand for high-intensity steel was bound to grow.

"As China becomes the world's manufacturing center, machinery, automobiles, chemicals, power generation and shipbuilding will all need a lot of special steel," Zhou said.

The special steel industry has been recovering from a stagnant period caused by the high cost of raw materials, especially ferroalloy.

Zhou said it was wise for CITIC Pacific to step in at a time when the special steel industry was still at a low point.

At a recent steel seminar in Shanghai, Hu Mingyang, secretary-general of the China Special Steel Enterprises Association, said the special steel market will grow steadily and healthily this year and see a reasonable increase of output over the next few years.

In the first five months of this year, the association's 32 members posted growth of above 8 percent in special steel output over the same period last year.

(China Daily June 10, 2006)