Chang Lin: Excavating “urban gold ore”, developing venous industry

Asian Metal: Good morning, Mr. Chang, and thank you for accepting this interview. Huanjia Group has become a leading enterprise of recycle and processing of renewable resources. Would you like introducing your company briefly?

Chang: Huanjia Group has been engaged in renewable resources industry for more than 30 years. It developed from a salvage station and began to take shape in 2006. With over 20 years of concerted efforts, learning from domestic and foreign mature experience and continuously upgrading techniques and facilities, Huanjia has become a leading company in domestic renewable resources industry.

On products, we have developed from single recovery of goods to multi industries like steel scrap, waste plastic, paper, glass and non-ferrous metals. We have facilities of recycling, sorting, adjusting, distributing, processing and selling of renewable resources. Our production scale covers nearly all manufacturing and household wastes and we established a cyclic utilization system of renewable resources.

Data showed that Huanjia Group achieved RMB100 million of operation revenues in 2006 and they were RMB4-5 billion in 2012.

We only had more than one hundred workers at the beginning and now we have over 3,000 workers. If we take all related industries in consideration, we have more than 20,000 workers, generating about 50,000 jobs in Henan Province, Hebei Province and East China as well direct 100,000 jobs in the local region.

Asian Metal: Every leading company in an industry has its spirit. What is the management idea of Huanjia? What is your advantage in steel scrap business?

Chang: Cooperation and all-win is our management idea. Huanjia is striving to build a comprehensive industrial platform and to establish a mutual beneficial relationship with participants in steel scrap market, especially small-scale players in the industry.

About being established in steel scrap market, Huanjia has formed a stable economic strength since the economy crisis in 2008. More participants in steel scrap market have joined in Huanjia steel scrap platform in form of joint venture or cooperation. They are steel scrap suppliers, scrap users, steel mills and middlemen. With expanding steel scrap service team, Huanjia gains stronger competitiveness in the market.

In addition, Huanjia has two development advantages in current steel scrap industry. First, Huanjia has accumulated abundant capital strength after years of development. Second, the multi-industry and multi-region development form endows Huanjia with unique “channels”. To sum up, advantages in labor, resources and capital make Huanjia flourishing.

Asian Metal: Domestic steel scrap experienced sluggish movement in 2012 and both downstream and upstream market of steel industry stepped into a stalemate in the end of the year due to the Spring Festival. What factors result in current steel scrap market in your opinion?

Chang: Following factors may explain that. First, many factors can limit development of steel scrap market and the fundamental one is current domestic steel market. Viewed from the domestic economy development, steel industry is the pillar of economic development but Chinese steel industry has loopholes in structure. These problems are reflected by sharp contradiction between supply and demand caused by excess capacity. For instance, some regions just strived for economic profits, but ignored balance between supply and demand in the past years. With protection and even indulgence from local government, medium and small private steel mills flooded, causing increasing capacity and unreliable quality. This is the root of contradiction in China’s steel industry.

Second, domestic steel scrap prices are more transparent and the profit margin continues to decrease. Upgrading, reforming and expanding of enterprise are essential to attracting more private capital, but the difficulty also enlarges. In addition, government’s support for steel scrap industry and related policies will not point a clear direction for the market in a short time. Taking steel scrap tax policy as an example, added-value tax was levied in full amount and returned by 50% on schedule in 2009 and it was returned by 50% in 2010. The preferential policy was cancelled in 2011. Nowadays, the government cancels GSP drawback policy but provides targeted support and guide according to the unique characteristics of steel scrap industry. Since 2012, Steel Scrap Industry Association has encouraged enterprises to build steel scrap processing and distributing bases and given these bases tax support. Large-scale processing and distributing service is a trend of steel scrap industry. As an operator of an enterprise, I believe that development of steel scrap market cannot only rely on policy support, and enterprises should perfect themselves and accumulate experience. Only by this way, can they create values.

Third, Chinese steel scrap market has not reached a balance between supply and demand. Steel mills are unwilling to use steel scrap in steelmaking due to high costs, which has negative impact on the price trend. However, according to the ‘Twelfth Five-Year Plan’, the government advocates consumption of renewable resources. Steel scrap is renewable, energy saving and environment friendly, and it is an ideal raw material for steelmaking, thus short-flow process is a trend of steel industry. I hope related departments provide more supervision and guide on steelmaking methods.

At last, viewed from scale management, China’s steel scrap industry is scattered and disordered and resource circulation is lopsided in South and North China. The industry needs unified and centralized management in order to achieve sound development.

Asian Metal: How do you comment on the future trend of steel scrap market and when will it rebound?

Chang: I am optimistic about steel scrap market development, but I think it will take 2-3 years at least for the industry to achieve more comprehensive and sounder development due to its unique characters mentioned above.

Asian Metal: According to market research, there are still many steel mills that prefer to cooperate with retail investors, but market integration is the trend in a long run. We know Huanjia is a large-scale processing and distributing enterprise, and what do you think of the trend?

Chang: The government will release preferential policies for large-scale processing and distributing enterprises in order to give superiority of settlement prices to them and to fight against nonstandard operation of retail enterprises. As we know, enterprises will face noteworthy increasing costs of building plants, hiring human resources and upgrading processing methods after having a certain scale. Final factory costs of steel scrap products will further increase. This is a disadvantage.

However, retail traders are more flexible in steel scrap trading and can provide higher-quality products than large-scale enterprises, but the latter cannot manage to do it. For instance, a small private steel needs a little amount of steel scrap tends to purchase the material from retail traders as clearing form without stamp is more convenient and this can reduce costs. This is not permitted in the market as it may result in vicious competition. More high-quality steel scrap will be consumed by small steel mills rather than large ones. Therefore, I vote for integration and standard management in steel scrap industry for its long-term development.

In addition, viewed from development of steel industry, a trend of economic development is to cut backward capacity, carry out annexation and reorganization and even shut down nonstandard private steel workshops by force. In conclusion, I believe the most important thing is to enhance supervision and management on both demand and supply to realize sound and perfect development of steel scrap market.

Asian Metal: Will your company set foot in steel scrap import business?

Chang: Huanjia Group has applied to related departments for imported steel scrap license. As for development of an enterprise, I think there are many advantages in using imported scrap. First, using imported steel scrap will reduce a lot of extra operations and costs. Second, locking steel scrap prices by hedging operation will reduce importing risk. Third, fluctuation of domestic steel scrap prices will narrow if enterprises hold high stocks of imported steel scrap. Huanjia has established cooperation with Liaoning Champion Futures and formed a complete data model. We will monitor the price fluctuation of steel scrap based on the above 80% of similarity between steel scrap futures and rebar futures to ensure low risk in importing operation and to avoid loss.

Asian Metal: According to current development, there is a big difference between southern steel scrap and northern market. How will Huanjia deal with the difference?

Chang: Difference between southern market and northern market is closely related to economic environment and recovery in each region. Huanjia has had firm business contact with customers in Jiangsu and Yangtze River delta area and we have a sober understanding about the difference between these two markets. First, South China has highly developed processing and manufacturing industry, which provides a wide and sufficient supply of steel scrap. Second, steel mills in southern China cluster together and have strong demand for steel scrap. Circulation of the material is active. Third, besides automobile transportation, sea transportation along Yangtze River and at ports is more convenient and rapid, which significantly shortens the service period of steel scrap processing and distributing. Consequently, enterprises face reduced operation costs, but the northern market does not have these advantages.

Turning eyes to the northern market, steel mills in Liaoning, a part of Northeast Rust Belts, only use steel scrap as kind of burden fines previously. Steel scrap market developed into a narrower corner. According to our business in Liaoning, steel mills in the regions are mainly located in Anshan, Liaoyang, Shenyang and Benxi. Headquarters of Huanjia is in Dalian, so it is 300-350km away from these mills. The distance is no longer a proper transportation choice. Therefore, Huanjia is trying to build a new processing base in central Liaoning in order to adjoin steel scrap sources and enterprises of using steel scrap. Meanwhile, we will take advantages of capital, channel and human resources to break the regional limit on the base of proper layout and stable development. Huanjia has established subsidiaries in Shanghai, Jiangsu and Beijing and plans to build independent subsidiaries in more regions.

Asian Metal: We learned that Huanjia aims to be a world tycoon in the renewable resources industry. Would you like sharing the development planning of your company?

Chang: Huanjia’s businesses of renewable resources have covered 20-30 countries. Huanjia established independent subsidiaries in USA and UK during 2010-2011 in order to expand trading channels. For Chinese market, there have been nearly 80% of foreign toll-traders of renewable resources coming to compete in our market. In my opinion, China will present increasing demand for renewable resources in next 10-20 years, which indicates a promising future for the industry. Based on Chinese production period of steel scrap, China has to experience storage of the material for at least 10-15 years in order to achieve a balance between outputs and usage. Huanjia is striving to take a small step in 3 years and to take a big one in 5 years, increasing total values of output to RMB10 billion in 3 years. We aim to form a global purchase system and serve society through our processing and distributing platform, which is also an excellent future we have all been waiting for.

Asian Metal: Thank you again for accepting this interview and for substantial support from your company. We believe your insightful views will provide guide for other participants.