Content
1. Industry Analysis
1.1The general situation of steel industry
2. Market structure
2.1Oligopoly
2.2 Characteristics of oligopoly
2.3 Extend of concentration of the steel market
3. Supply demand
3.1Cyclical steel industry
3.2 Demand determinants
3.2.1 Expectation of future prices and income
3.2.2 Number of potential buyers
3.2.3 Price of related goods
3.3 Characteristics of supply of the steel industry and Baosteel
3.3.1 Scale of production
3.3.2 Nature of product
3.3.3 Dependant on natural resource
3.4 Determinants of supply in Baosteel
3.4.1 Cost of production
3.4.2 Productivity
3.4.3 Cyclical influence of other industries
3.5 The excess capacity of steel industry
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4. Elasticity
4.1PED
4.1.1Definition
4.1.2 Determinants of PED
4.1.2.1The closeness of substitutes
4.1.2.2Necessity
4.1.2.3Time period
4.2 YED
4.2.1Definition
4.2.2 Engel Curve
4.2.3 Cyclical steel industry
4.3 XED
4.3.1Definition
4.3.2 The XED of steel
4.4 PES
4.4.1Definition
4.4.2 Determinants of XED
4.4.2.1 storage
4.4.2.2 labor mobility and skilled workers
4.4.2.3 time period
5. Cost and revenue
6. Market failure
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6.1Externalities
6.1.1 Negative production externality
6.1.1.1 Taxes
6.1.2 Positive production externality
6.1.2.1 Subsidy
6.1.2.2 Government support
6.1.3 Negative consumption externality
6.1.3.1 Government policy
6.1.4 Positive consumption externality
6.2 Sustainability
6.2.1 Current situation
6.2.2 The behaviors of Baosteel
6.3 Information asymmetry
7. Competition strategy
7.1Non-collusive strategies
7.1.1 Heavy advertising and brand name creation
7.1.2 Continuous product differentiation
7.1.3 Excessive product proliferation
7.1.4 Extended guarantees
7.2Collusive strategies
7.2.1Collusion
7.3Other strategy
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7.3.1Merge and reorganization
8. Pricing strategy
8.1Price discrimination
8.1.1Third degree of price discrimination
8.1.2 Baosteel sets different steel products prices for different
consumers.
8.1.3Baosteel sets different prices for different cities.
9. Decision making
9.1 Overall developing goals for Baosteel
9.1.1 Decision making of strategy
9.1.2 Decision making of externality
9.1.3 Decision making of cooperation with government
Industry analysis
The general situation about the steel industry：
Iron and steel industry is engaged in ferrous metal mineral acquisition
and black metal smelting processing and other industrial production
activities of industries, including metal iron, chrome, manganese and
other mineral smelting ferroalloy industry, steel wire and its products
such as subdivision industry, is one of the important raw materials
industrial nations. In addition, due to the iron and steel production also
involves selecting products and other non-metallic minerals industry
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categories, such as coking, refractory materials, carbon products, thus
will usually these industrial categories are also incorporated into the
scope of iron and steel industry. China’s steel production has the
largest scale, however, the degree of industrial concentration is the
most low; Chinese has the largest steel market.
There are few main steel products in the steel industry:
1. Bearing steel: bearing steel is used in the manufacture of
rolling bearings, roller and sleeve and other types of steel, also
can be used in the production of precision measuring tool, cold
stamping dies, machine screw, and diesel engine oil pump
precision matching parts.
2. Beam: Beams is also known as steel Beam, is a cross section for
the h shape of strip steel. Beam regular beam and light beams,
h-beam 3 kinds. Cross section shape is for slotted steel.
3. High Speed steel: Mainly used for high speed machine tool
cutting tool of high carbon high alloy ledeburite steel.
4. Spring steel: Spring steel is mainly has good elasticity, and
since it is under the condition of dynamic load environment
work, so to make the material of spring's main should have high
yield strength; Under the heavy load does not cause plastic
deformation; Should have high fatigue strength, under the load
repeatedly function has a long service life; And have enough
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toughness and plasticity, in case of suddenly brittle fracture
under the action of a wallop.
The total scale of Chinese steel industry:
According to “China's steel industry yearbook”, in 2007 the output
of the steel in China is about 490 million of tons. And in 2008, the total
output firstly breaks through 500 millions of tons. China's steel industry
occupies the main status in the world economy, since 1996 China has
been the top of the world’s steel industry. But this does not mean that
China's steel industry in the world economy have absolute advantages, in
the same condition, China's steel industry compared with the world ,
although the cost of steel products is low, technology in the continuous
innovation,
but
also
many
deficiencies
competitiveness.
Market structure
Market structure of the steel industry: oligopoly
I. Characteristics:
1. Few companies operate in the market.
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in
industry
lack
of
(Figure 1)
According to China Steel Industry Association’s data, there were
1889 steel company in China, the total output is about 7.1 hundred
million tons. But from Figure 1 we can see that the top 20 companies of
steel industry in China have made up 61.0% of the whole market. The
main companies are HBIS, Anshan Iron and Steel Group Corporation,
Shanghai Baosteel Group, and WISCO(武汉钢铁集团). HBIS（河北钢铁
集团有限公司 ）is at the top of the concentration ratio list, it occupies
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9.7% of the market. Anshan Iron and Steel Group Corporation occupies
about 6.3% of the market. Shanghai Baosteel Group occupies 6.0% of the
market and WISCO occupies about 5.1% of the market. Compare to the
total number of the steel companies in China, the number of 20 in some
ways is a relatively small number to the total number 1889. Overall, there
are few companies dominate or operate in the steel market of China.
2. They produce homogeneous products.
We looked up on the internet and we find that there are 3 main
product of the steel industry:
a. Railway steel, which refers to the main production and
construction of steel for railway department.
b. Reinforce refers to the steel reinforced concrete and reinforced
concrete with steel, for circular cross section, sometimes for the square
with rounded corner.
c. Steel tube
From this information, we can see that the top 20 companies produce
almost the same kind of product. And almost every steel product produces
familiar products. Overall, they produce homogeneous products.
3. Significant entry barriers exist.
a. Capital barriers: we know that the steel industry is a large amount
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of initial capital, it is a capital-intensive industry, and it has obvious
characteristics of economies of scale. Capital needs become a big
obstacle to stand in the way of new entrants. Therefore, for most
enterprises, enter the amount of capital iron and steel industry is an
important limiting factor.
b. Technology barriers: with the development of science and
technology, at present, the demand for iron and steel industries has not
only confined to the original ordinary steel, the steel products focus on
high technology content of products, it also would require companies to
increase scientific research strength, and the new entrants put forward
higher technical requirements.
c. Policy barriers: the national authorization, stipulated explicitly
market access conditions, form into the policy barriers, as building
economized, the improvement of environmental awareness. Any
enterprise wants to enter the iron and steel industry must obtain approval
permit of the country. The steel industry gradually transformed from
extensive to intensive, countries complete control. In addition, the lack of
experienced high-quality management and technical personnel also enter
the talent barriers. Therefore, into the steel industry is difficult.
According to those three characteristics we just talk about, the steel
industry of China has few companies operate in the market, the
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companies produce homogeneous product and there are significant entry
barriers exist. So the market structure of Chinese steel industry is clearly
oligopoly.
Ⅱ. Extend of concentration of the steel market.
At present, China's steel industry compared to the world's major
steel the market concentration degree lower. The top 10 steel enterprises
in China's steel industry in 2004 is accounted from 34.7%, fell to 33.6%
in 2005, and in 2006 dropped to 29%. In November 2008 it became 30%.
The result that the number of China's steel enterprises, individual
enterprises have increased. Overall, China's steel industry in low
concentration of the state. The above three aspects can be drawn, the steel
industry’s market concentration in China is still at a low concentration
oligopoly state; the degree of product differentiation is not big; new
entrants face high capital, technical and administrative barriers, this is the
typical characteristics of oligopoly market
Supply and demand
Before discussing the market structure of steel industry, let’s first define
the term market. A market is a place, physical or virtual, where the buyers
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and sellers of goods and services meet. So the market not only refers to
the actual place, but also includes indirect buying when buyers and sellers
communicate remotely. And in this project, we simply divide the steel
market into the demand part and the supply part.
For steel market, the demanders are usually the suppliers of other markets
because steel is the raw material for many products in different markets
such as infrastructure, machinery, household appliances, automobiles,
vessels, real estate and so on. And because of this characteristic, steel
industry is a typical cyclical industry because its demand is greatly
influenced by the supply of other products. If the economic condition is
optimistic which means people have more incomes to by houses, cars and
household appliances, than the demand of steel will increase. But if the
general economic condition is bad, than the demand for such products
will
decrease,
the
demand
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for
steel
will
decrease.
来源：世界钢铁协会(World Steel Association)
For example, as the global economy develops the demand for steel
increases gradually from 2000 to 2007. But from 2007 to 2009 when
economic crisis occurs, the demand for steel decreased. And after the
economic crisis, when global economy gradually recovers, the demand
for steel increase rapidly.
Not only does the global economy condition (income) affect the demand
of steel, many other non-price determinants also affect the demand of
steel.
1. Expectation of future prices and income
Due to the oversupply of steel, even though the price of steel keeps
decreasing, the demand of steel has already been satisfied and cannot
increase anymore.
2. Number of potential buyers
Since the demand has been satisfied, the number of potential buyers
decreases the demand of steel deceases.
3. Price of related goods
The demand of some complementary goods of steel will affect the
demand of steel. For example, if the demand of concrete increases, the
demand of steel will also increases. Because of the unique property of
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steel as a raw material, such as the temperature, pressure and the intensity,
it does not have very close substitutes. Some related substitutes are alloy,
plastic, and wood and so on. So the demand of these related goods cannot
greatly affect the demand of steel.
For the demand of steel, since steel is an underground natural resource,
the exploitation of steel is not affected by seasonal change. For the effect
of government policy on the demand of steel, we will discuss it later in
the government intervention part.
After discussing about the factors affect the demand of steel, let’s focus
on the supply.
Here, we characterize the supply in steel industry in many perspectives.
First, the scale of production: The quantity supplied of steel industry is
very large. For example, the average quantity supplied of Baosteel(宝钢)
is 30 million tons per year. The areas of steel firms are also significant.
Baosteel’s firm occupies around 20 km2, including 130 thousands of
workers.
Second, the nature of products: Steel firms provide homogeneous but
differential products. For example, Baosteel provides ten types of steel in
different industries such as machinery, household appliances, automobiles,
vessels, real estate, oil and gas transmission, space and aeronautics
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industry and infrastructure.
Third, the production of steel greatly depends on the natural resources.
Baosteel has its own subcompany to exploit raw materials for steel
production.
After introducing the basic characteristics of the supply of steel industry,
let’s further discuss the determinants of the supply of Baosteel.
First, the supply of Baosteel is closely related to its cost of production,
such as the cost for factors of production like natural sources, capitals,
labor and entrepreneurship.
For example:
表 1 宝钢 2013 年 2 月主要品种价格汇总
数据来源：钢联云终端
备注：以上价格均不含税
图 1 进口矿及冶金焦价格节节攀升
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单位：元/吨
数据来源：钢联云终端
As the graph shows, since the price of iron ore increased significantly
from August 2012 to December 2012, the prices of Baosteel in February
2013 are more than that of January 2013.
Second, the productivity of Baosteel can also greatly influence its supply.
Productivity is the amount of output per unit of input. If a firm can
produce more in the same period of time using same factors of production,
the firm will increase its profit by increasing its output. Methods of
production and technological improvement are all considered as the
productivity of a firm.
1. Methods improvement
For example, Baosteel strives to create better incentives for workers, so
Baosteel apply three mechanisms to improve the productivity of labor:
the employee development mechanism, the employee incentive
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mechanism and the employee communication mechanism.
2. Technological improvement
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As the largest and the best steel firm in China, Baosteel acts as a
leader in China steel industry and is always improving its technology.
Till now, Baosteel has 8711 patents, including 1668 invention patents.
Baosteel divides its technological improvements into three main parts:
R&D and technical service(产品研发与技术服务)，advanced
technology (前沿技术研究) and intellectual property(知识产权战略).
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Third, since the supply of steel is cyclical and is related to many other
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markets, the complements and substitutes can also affect the supply of
steel. For example, the supply of concrete and houses will affect the
supply of steel.
From the graphs above, we can see that the trends of the supply of
steel, the supply of concrete and the supply of houses are similar.
Here we want to mention that due to the unique property of steel as a
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raw material, such as the temperature, pressure and the intensity, it
doesn’t have very close substitutes. Some related substitutes are alloy,
plastic, wood and so on. So the supply of these related goods cannot
greatly affect the supply of steel.
At last, for the supply and demand in steel industry, there’s an
important phenomenon which is closely related to economy --- the
excess capacity of steel in China. Excess capacity means the
productive capacity is higher than the consumptive capacity. The
excess capacity is simply represented by the oversupply in a market.
In steel industry, the excess capacity problem is very serious. Now, the
amount of oversupply reaches 1200 million tons but there are still 70
million tons of steel being produced. According to the current situation
of steel industry, the excess capacity is probably caused by the
increase in small steel firms which only produce low-tech steel and the
repetitive production of profitable types of steel. According to the law
of supply, since the market is now in an oversupply, the price of steel
will decrease. And according to the data on the Internet, the price of
steel keeps decreasing from March 2013 to June 2013, this result
confirms with our prediction.
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Elasticity
Elasticity is an indicator of sensitiveness. It is the responsiveness of
quantity demanded/supplied to a change in price/income/cross. We can
consider elasticity as consumers’ purchasing decision-making process to
price/income/cross change. We are going to discuss four types of
elasticity in steel market.
Let’s talk about the price elasticity of demand (PED) which means a
measure of the responsiveness of consumers to a change in the price of a
particular good. In this steel market, we consider that the PED is small
which means consumers are not so sensitive to a price change of a
particular good because of the following determinants.
1. Firstly, it is the closeness of substitutes. Closer the products of
companies, bigger the PED. The features of steel are that steel can be
recycled and steel can adjust its mechanical property by heat treatment
in order to meet the needs of people. According to those properties,
steel is hard to be replaced, so steel do not have close substitute, and it
only have some related substitutes like other raw materials including
alloy, wood and so on and so forth. Each raw material because of the
difference between their properties, their application is also different.
The closeness of substitutes is quite small so that the PED of steel is
small according to this determinant.
2. Second, it is the necessity. Steel is a kind of raw material, which will be
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used in many industries, for example, the real estate industry,
household appliances industry that sort of thing. Therefore, steel is
quite necessary in many industries, which will lead to a small PED.
3. Third, time period also will affect the PED. In the long run, consumers
have enough time to contrast the price and the quality of other steel
companies, even they can consider importing steel from foreign
countries to get better steel. Therefore, the PED will be relatively
higher in the end. However, in the short run, the consumers do not have
enough time to make decisions. Even if they want to import the steel
from foreign countries, the international transit time might be longer
than internal transit, which means the time cost will be bigger. In this
case, PED of Baosteel will be smaller.
In addition, generally Baosteel increases the price of products which
means that the price change will not cause a big decrease in quantity
demanded so that the PED is inelastic. Increase the price of products can
increase the total revenue.
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Then, we will discuss about the second type of elasticity called income
elasticity of demand (YED), which means a measure of the
responsiveness of consumer’s demand for a particular good to a change
in their income.
1. First, Engel Curve reflects the relationship between the quantity
demanded of a good and the income. In the steel market, steel is basic
material, which is widely used in real estate industry, car industry and
household appliances industry and the goods in those industries are
necessary in the daily life. So steel can be considered as a kind of
basic and necessary good so that according to the Engel Curve shown
below, n is less than one, which means the great change in income will
only lead to a small change in demand of steel.
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Engel Curve
2. Second, steel industry is considered ‘cyclical’ as a result of their
income elasticity of demand. Steel industry fluctuates with the same
fluctuation of economy, because steel is the raw material and it has
close relationship with car industry, real estate industry and that sort of
cyclical industries.
钢材主要下游行业需求权重
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Take real estate industry as an example. Real estate industry as one of
the important downstream industries of steel industry, the boom of it
is closely related to the steel industry. In 2013, the government of
China established regulation to control the housing price. This
regulation will also affect steel industry. In the short run, the steel
prices will be suppressed. In long run, real estate regulation will
directly affect the demand of building materials including steel. Real
estate enterprise investment speed may slow because of thus
government policy so that the demand of steel will decrease. Because
the close relationship between real estate industry and steel industry
and the real estate industry is cyclical which will be greatly
influenced by the current economic situation, the steel industry can be
also considered as cyclical industry.
In addition, we will discuss the cross-priced elasticity of demand
(XED) in steel market. Cross-priced elasticity of demand is defined as
a measure of the responsiveness of consumers of one good to a change
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in the price of a related good. Bigger the value of XED, bigger the
similarity between products. Steel has no close substitutes and is
irreplaceable so that the XED of steel is small. We have talked about
how will price change of complements affects the demand of steel
before. Now, let’s analyze the relatedness between steel and its
complements. Take cement as an example. Cement and steel are both
raw material, which will be used in car industry, real-estate industry,
shipbuilding industry that sort of thing so that they are closely related
and they have negative XED coefficient. From the following graph,
we can see that the price of deformed steel bar as a kind of steel
product keep the consistent price fluctuations trend with that of
cement.
螺纹钢与水泥现货报价(单位：元/吨)
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Finally, we will also talk about the price elasticity of supply (PES) which
means a measure of the responsiveness of a producer of a particular good
to change in the price of that good. Many determinants will affect the
PES in steel market.
1. First, the storage may influence the PES of steel. In this case, we
categorize the steel into two types including the common steel and
steel requiring high technology. There is an excess supply of common
steel because every firm including the small firms with limited
technical personnel and equipment can produce it and there is not
enough demand. The inventory of common steel is sufficient and can
response to the market fast so that the PES of common steel is
relatively big. On the other hand, only large enterprises can produce
the steel with high technical requirements, so there are not many
inventories. This kind of steel’s response to market is slow and the
PES is small than that of common steel. In the steel market, the
storage of Baosteel in 2013 is shown in the form below. From the form,
we can see that generally, the storage of Baosteel is sufficient so that
the PES of Baosteel in this case is big.
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2. Second, the labor mobility and skilled worker will also affect the PES.
In the short run, the technical personnel are difficult to find and the
current quantity of workers is not enough, so it will response slowly to
the market. PES will be small when the company has weak labor
mobility and lacking skilled workers.
3. Last, it is the time period. In short run, it is difficult to have enough
supply of steel. Also the equipment cannot keep up with the demand.
While in the long run, all adjustments are possible so that the supplier
have enough time to change, for example, employing more technical
personnel, buy more equipment and so on and so forth. In a word, PES
is bigger in the long run because all those determinants can be
adjusted.
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Cost and Revenue
Talking about the cost and revenue, there is a chart for the data
published in 2013. In this chart, we can find that the total cost is
decreasing while the total revenue is increasing. The firm is making
abnormal profit, and the amount of abnormal profit is also increasing
with a remarkable rate, which means, probably, the firm is enjoying the
economies of scale. Because we can see that the more amount of
production will result in a lower cost and bring higher benefit.
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For the cost, in this condition, there might be several reasons that will
result in the decrease in total cost:
1. It might be the Economies of scale that affect the total cost. Since we
knot that this company is quite a large and famous one, the increase
in the production might result in a lower average cost, and thus a
lower total cost.
2. Innovation can also help to lower down the cost. According to the
research on the internet, this company has developed a more
efficient way of producing steel, which will result in the lower cost for
per unit of the product. Finally, the total cost will be reduced.
About the revenue, since this company has some degree of monopoly
power, it can set the price at the point which marginal cost= marginal
revenue to gain the maximized profit.
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Also, the firm can increase its price, since the PED is relatively inelastic
for most of the consumers. A large increase in the price will just affect
the quantity demanded to a small extent so that the total revenue will
be rising if the price is rising. The firm also did like this, from the chart
below, we can clearly see the firm increased it revenue by rising prices.
As a result, the profit is maximized and rising since there is a lower and
lower cost while the revenue is increasing. The firm, enjoying from the
economies of scale can make a lot of profit in the production of steel.
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Externality
Sustainability
Market failure
Monopoly Power
1. Externality
Externality is the non-economic influence of the economic activities
entitle to others and society. Externality is a typical type of market failure
since the third party affected is even not in the market and economic
activities.
a) Negative production externality
In some aspects of the market, the marginal social cost is higher than the
marginal private cost. That means that the society wants less production
in order to decrease the externality. In the market of Baosteel, the
production of steel will cause significant air pollution. Also, some
workers die in the company due to the dangerous conditions. So we can
see that people who suffer from the pollution and die of the accidents are
not the buyers and suppliers. They are the third party affected by the
production of steels. We know that Baosteel pay cost for their production,
but there is extra cost, which is borne by people who did not in the market
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of Baosteel.
It is reported that people in a housing estate announced that their life are
disturbed by the severe contamination caused by the Baosteel. The name
of this place is FuHao park, it locates in the north west of Baosteel’s steel
sheet mill. An old man in this place says that he smells pungent smoke
every day, this have a strong impact on his life. In addition, all the
residents live around here face the same problem. The residents are out of
the economic activities, but their life has be affected by the production of
Baosteel. So the negative production externality occurs to the residents.
Solutions: Government imposes on the environment, they decide the tax
rate and levels according to the discharge amount of sulfur dioxide and
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solid garbage of the companies. From the charging of taxes, government
can both increase the revenue they get and decrease the amount of the
pollution. After the gorvernment get the complaint from residents live in
the area, they do several researches in the mill to measure the quality of
Baosteel. Also, Baosteel check their facilities and enhance their
producing standard to avoid the externality. So we can see that
government internalize the extra cost of the production by adding tax to
such companies. Also, as a producer of the externality, Baosteel pay
attention to the environmental protection in order to reduce the negative
externality. Comparing with other firms in the market, the negative
production externality of Baosteel is relatively low.
Market for normal steel
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As we can see from the graph, the market equilibrium price of normal
steel is much lower than the society optimal amount. As a result, the
quantity demanded is higher than the socially efficient quantity. The
externality in this case is the pollution, in order to reduce the externality,
governments impose the tax on the production to encourage firms to
improve their process in order to shift the supply curve.
b) Positive production externality
In some aspects of the market, the marginal social cost is lower than the
marginal private cost. That means that the society enjoy more than the
people join in the economic activities.
So the positive production
externality occurs in the market to the third parties. In the society, as the
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leader of steel industry, Baosteel brings many benefits in several aspects.
Especially in the development of the innovations, the technology of
Baosteel brings positive externality to the society. During 2006, the input
rate of annual R&D reached 0.92%; the sales rate of new products
reached 22.8%; 821 patents was applied. From those data we can see that
Baosteel attach importance to innovation, in addition, the action of it both
can encourage all the firms in the market and service for the
society.
Solutions: government gives subsidy to encourage firms to invest new
energy saving equipment. They encourage firms to update their
production, carry out technological innovation by several financial
supports, such as loan with discounted interests, and substitute subsidies
with reward.
In addition, government signs contracts with Baosteel to promote the
development of the steel industry. The governments in Shanghai create
conditions for Baosteel to promote the competitiveness of the industry.
With the financial polices help of the government, Baosteel can carry out
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innovation-driven changes .So we can see that there are several kinds of
subsidies. And all of them can encourage firms to increase their quantity
supplied to approach the social optimal amount.
c) Negative consumption externality
The consumption of steels will cause negative consumption externality
and the society will pay for that. The equilibrium price and quantity are
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higher than the marginal social benefit. The consumers enjoy more than
the society, the consumption of the products will cause cost and paid by
the third parties beside the consumers and producers. The inappropriate
consumption of steel will cause excess production capacity, this will lead
the rapid increase of the energy consumption. In addition, the pressure
was given to the resources supply by the consumption of steel. We can
see that the increase of the consumption of steel will lead the increase of
the consumption of coal, this will also cause the energy tension to the
society.
解
决
方
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案
：
According to the great deal of resources consumed by steel industry,
government set police to control the production and consumption. The
targets for saving energy and reducing pollutant emissions were set forth
to all the public by the social development planning. It announced to cut
energy consumption per unit of GDP by 16% and cut carbon emissions by
17%.
d) Positive consumption externality
From the advance of the society, most of the buildings are established by
steel and concrete. The improvement of the material reduces the danger
caused by the disaster. Although people may be buried by the house in
violent earthquake, comparing with other materials, steel can weaken the
reaction of earthquake and protect people from danger in some extent.
The personnel casualty rate decrease from the using of the steels. So we
can say that the society enjoy more than the society, the consumption of
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the products will bring benefits to the third parties beside the consumers
and producers. As for that, the equilibrium price and quantity are less than
the marginal social benefit. Government may want more consumption of
steels to increase the benefits.
2. sustainability
When we consume resources, the best way for us is to meet the needs of
present generation without compromising the needs of the future
generations. The consumption of fossil fuels is the most acute problem of
sustainability.
As for the producing of steel, fossil fuels are the indispensability factors.
So we can say that the consumption of steel is also the consumption of
fossil fuels. The production and burning of natural gas, petroleum, and
coal emits the largest share of greenhouse gas emissions. As I have
mentioned before, the producing of steels will cause a significant
negative externalities, such as pollution and greenhouse gases. This will
seriously affect the environment, in another word, it is harmful for the
sustainable development of the world. What’s more, the energy consumed
by steel industry make up 10% of all the total energy consumption, the
water consumed by them make up 9% of national industrial water
consumption. So developing the circular economy of steel industry is
important to the national balance of energy and resources.
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According to the situation of the resources in the world, the development
of the steel industry is restricted by the tense situation of coal, electricity,
and transportation. Especially when steel industry is power hungry, so the
power shortage will restrict the development of steel industry too. As for
that, it is necessary for the steel industry to reduce their consumption and
excavate the potential of input and output.
Baosteel do well in the sustainable development, the equipment they use
is win-win for the society. The compressor-turbine unit they use can
collect all the coal gas yielded by the production of steel, which can
refuse to generate electricity for the areas. All the by-product is used as
resources in Baosteel, the concept of energy conservation are rooted in
the idea of them.
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3. Information asymmetry
In contract theory and economics, information asymmetry deals with the
study of decisions in transactions where one party has more or better
information than the other. In contrast to neo-classical economics, which
assumes perfect information, this is about "What We Don't Know
Analysis of the information asymmetry of the steel industry:
Steel industry practitioners divided into three groups: producers, traders
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and end-users, these three groups form a natural organic industry's "food
chain". A steel products in the industry chain needs to circulate in it,
which requires marketing, distribution of organic products whether or
healthy not, depending on the extent of the marketing function play.
From the beginning of March this year, the domestic steel market after a
long period of adjustment, the main varieties of steel prices continue to
rise; However, by mid-June, the domestic steel market has suddenly
turned down, the main varieties of steel prices fell sharply, including hot
rolled board price declines up to a thousand dollars, construction steel
prices fell 500 Yuan / ton. Fluctuations in steel prices are reasonable
period of time within a certain area of the market, because the
supply-demand balance point is constantly dynamically adjust them. But
steel prices on the 1st of a change, or even spike, is improperly adjusted.
The impact of non-normal fluctuations in steel prices for many reasons,
including a critical factor is the existence of information asymmetry
between the steel companies, distributors and end-users.
An expression of asymmetric information is information resources there
are differences in the parties to the transaction on the quantity and quality,
generally refers to the seller to the buyer more comprehensive than the
mastery of product-related information, the parties in the transaction have
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more maneuvering seller sex. However, the flow path of steel, due to
dealers in the steel distribution convergence links, so the dealer with
respect to iron and steel enterprises to grasp more market demand
information, as opposed to the end-user to know more steel supply
information, so the distribution comparative advantage in the information
provider's position.
Since there is a "compete" of interests between steel companies and
distributors, then in the steel distribution chain there must be a presence
of information asymmetries. But the outstanding problems are: First,
among steel companies, distributors, end-users there are man-made
phenomenon of asymmetric information, the parties will want to pass
information
through
the
manufacturing
process
of
asymmetric
information to mislead the other party has made marketing decisions in
their favor, and create products in circulation in the market in their favor
traffic flows and market, thus creating a good market opportunity and the
ability to grasp this opportunity to get beyond the industry average profit
of excess profits; Second country various macro-control measures on the
so-called concept of speculation, so the flow of the chain of many
participants abnormally mentality change, thereby affecting the stock
market to a reasonable release, resulting in increased frequency
fluctuations in steel prices, the adjustment increased.
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Steel companies, steel distributors, end users together constitute the steel
industry chain, the three parties should pursue economic theory, the
whole industry chain optimization, and then allocate their profits
industrial chain optimization approach. But to do that, we must establish
a reasonable distribution of benefits, interest and restraint mechanisms
between parties. From the current situation, to achieve a reasonable
distribution of the tripartite interests and the interests of the constraints
requires iron and steel enterprises as suppliers of products can be steel
distribution paradigm shift from the dealer system for agents system.
Under the agency system, the dependence of interests between steel
companies and dealers will show the way through the system constraint is
more prominent, due to give dealers the necessary flow of profits (agency
fees) on the distribution of benefits for security, dealers between steel
companies compete with the conflicting interests of the circulation will be
reduced artificially create information asymmetries eased to some extent,
that information exchange is relatively smooth and accurate.
Competition and pricing strategy
In order to increase the revenue, Baosteel has some competition strategies
including collusive strategy, non-collusive strategy and other strategy. We
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will discuss how Baosteel increases their revenue by these competition
strategies in the following paragraphs.
1. Firstly, it is the heavy advertising and brand name creation. Baosteel
has advertising videos, which show the productive process, introduce
the equipment and the application of Baosteel’s products. The
advertisement of Baosteel can increase its corporate image and let
consumers know more about its goods, its technology, and its
production. This band name creation can increase the demand of
Baosteel, therefore, increasing the revenue. (Refer to the advertising
video and the website is given below.)
2. Second, it is to differentiate the products, and companies can achieve
it by improving their products with higher quality and developing
some new products that are different from products of other
companies so the monopoly power of the company will increase.
There is a picture of inspection certificate of Baosteel, which ensures
the high quality of steel in Baosteel. (Refer to graph 1below). In
addition, in 2010, Baosteel independently developed the super thick
heavy stainless steel plate, which was successfully used in the key
equipment of nuclear of EPR project in Tai Shan, Guang Dong. This
was the first time domestic nuclear power construction adopted
domestic stainless steel to manufacture nuclear key equipment. In this
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case, Baosteel broke the monopoly of import of super thick heavy
stainless steel plate, which increased the monopoly power of Baosteel
in Chinese market and its revenue has been increased greatly.
Graph 1
3. Third, excessive product proliferation can also work. Companies
should diversify their products and develop many derivative products
so that their market share will increase and finally increase the
revenue. For example, Baosteel has various kinds of steel products.
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The following form shows the products of Baosteel.
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Baosteel has diversified their products so their goods are used in
plenty of areas that increase the number of consumers and demand.
Also, Baosteel Group Corporation has many subordinate companies
so that it can cover many related industries in order to increase their
revenue. And, Baosteel adds a new business named electric business
platform. Adapting to the Internet economy development trend, based
on baosteel procurement business model, and the optimization and
transformation of sales service model, expand the development space
of electronic commerce industrialization. This new business will
increase the market share of Baosteel and expand the sales patfrom.
4. Fourth, it is the after-sale service. The good after-sale service can
provide more guarantees for consumers, which will attract more
consumers and consumers will trust the company more. Baosteel has a
perfect after-sale service system. Baosteel has a complete set of
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financial services, which provides a comprehensive financial service
of supply financing chain of payment and settlement and has the first
third party pay license named “Oriental Fu Tong” in the industry area.
Also, Baosteel relying on the company processing ability that covers
all the country, provide more close-fitting service to the consumers.
This convenient service will attract more consumers.
The above is the non-collusive strategy, then we will discuss about the
collusive strategy. The collusion, which means firms agree to engage in
anti-competitive behavior and to work as a whole, will result in a cartel,
which can be regarded as a big monopoly company in this market.
Similar to the monopoly market, cartel can make profits in the long run
because of a greater monopoly power. On Sep. 3 rd 2004, Baosteel and
China Shipping signed a strategic cooperation agreement so that they can
have a new development in their own field and can achieve a win-win
situation. The two companies can make full use of resources to improve
competitiveness of their main business.
However, merger and reorganization can also work. In 2007, Baosteel
signed a capital recombination of agreement with the government of the
Xinjiang Autonomous Region increasing capital to reorganize the Bayi
Iron and Steel Cooperation. And in 2008, Guang Dong Iron and Steel
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Group Co. LTD. which is organized by Baosteel, State-owned assets
supervision and administration commission of Guang Dong province and
the Guang Zhou state-owned assets supervision and administration
commission together was unveiled that promoted the Zhan Jiang steel
project. These decisions increase the monopoly power of Baosteel and
greatly increase its revenue.
Except competition strategies, pricing strategies can also work. Pricing
discrimination is considered as a common used pricing strategy in steel
market. The steel market is the third degree of price discrimination,
which means the firms will take advantage of differing PED and the good
is resalable.
1. Firstly, Baosteel sets different price depending on different consumers
because the different PED of them. For the big companies, they
usually consume a great number of steels with high quality and high
technology requirement, Baosteel has different prices for different
producsts, so the price for the big companies is higher due to the
smaller PED.
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The different price of different steel products of Baosteel
2. Second, Baosteel also has different price for different city. For
example, the real estate industry is well-developed in cities like
Beijing and Shanghai, the PED there is inelastic, so Baosteel set a
higher price for the big cities. In December, the price of deformed
steel bar increases 200 yuan just within two weeks in Beijing and
Tianjing. With the rise in price in these two cities, the steel prices
increases in most regions of China.
The price discrimination can let company have maximum revenue to
make some abnormal profit.
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Decision Making
9.1 Overall developing goal for Baosteel
9.1.1 Decision making of strategy
9.1.2 Decision making of externality
9.1.3 Decision making of cooperation with government
1.Overall developing goals for Baosteel
As one of the largest steel groups and the leader of steel industry in China,
Baosteel needs to take full advantage of its large scale of production.
Baosteel has many sub companies in different markets and have different
goals. For example, Baosteel has six companies specializing in producing
differentiated steel ranging from normal steel to high-tech steel. Although
in the economics, we learn that large scale of production may cause
diseconomies of scale, if Baosteel’s sub companies all have very clear
business and goals, Baosteel can also make decision quickly and deliver
instructions efficiently due to the clear specialization and division of labor.
So we suggest Baosteel to further specialize the business of each sub
companies so that they could have enough power to develop and make
decisions without much restriction. Also, Baosteel can develop its own
coal companies and logistics companies to decrease the cost of
production. Baosteel has already set up a coal company specializing in
exploiting and processing raw materials.
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Since steel industry is very cyclical, Baosteel needs to extend its business
in other industries. Now, Baosteel has already cooperated with Coco Cola
and Pepsi to produce the metal can. We suggest Baosteel develop in a
wider range of industry such as chemical industry and maybe real estate
industry.
Since Baosteel produces many common steel products which are
homogeneous to the products of many other smaller firms, Baosteel is
under the pressure of excess capacity of supply. From the current trend of
China steel industry we can see that more and more small firms are
producing steel with low technology requirements and Baosteel can enjoy
less benefit from these common steel products. We suggest Baosteel to
focus more on creativity both as a leader in steel industry and to
differentiate their products. If Baosteel strives to develop its creativity, it
will face less loss in the excess capacity of supply. Improving creativity is
also essential for the long run development of Basteel since as China’s
economy grows, the demand for high quality and high technology steel
will greatly increase, if Baosteel can meet much demand, Chinese
companies will no more import steel form other countries and as the first
supplier in these steel, Baosteel will quickly occupy a large amount of
market share and enjoys many benefits.
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After the general guidelines for future focus of Baosteel, we will specify
these goals into the strategy perspective and the externality and
government cooperation perspective.
1. Decision making of strategy
We have discussed the recent pricing strategies and competition strategies
of Baosteel. From our points of view, Baosteel should continue using
those strategies and improve them meanwhile. Firstly, let’s talk about the
competition strategies. Keep on develop some innovations to diversify
their products which can increase their monopoly power, and nowadays
with the development of the technologies, people demand for high-tech
products and new technology will be bigger and bigger. Brand name
creation is also important which can let consumer know more about the
culture and production of Baosteel. Baosteel also should keep the high
quality of products and at the same time, it can enter a new market in
order to expand the market and increase their market shares. The
after-sale service and supporting service are also essential. More service
can let consumers feel more convenient and have a good impression of
the company, which will increase the total revenues. Baosteel can have a
strategic cooperation with more companies. What’s more, Baosteel can
continue to amalgamate other companies at the right time in order to
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increase their monopoly power and can decrease the number of small
companies in order to improve the steel industry concentration, which the
government also promotes. Second, price discrimination should be
maintained and improved also. Baosteel should continue to have the
different prices for different products and consumers in order to earn
more abnormal profits.
2. Decision making of externality
Base on the negative externality they made, Baosteel did several
measures to decrease the extra cost they made to the society. Although
they pay attention to the research and development during those years,
they have far to go to innovate their equipment.
As they have already become the leader of the steel industry, so they can
focus on the innovation part. Especially when the pollution made by the
production seriously threatens the environment, so I think they can adjust
their process of production and improve their energy conservation further.
They can set more prize to encourage workers to innovate, rooted the
concept of energy saving in everyone’s mind.
3. Decision making on cooperation with government
The relationship between Baosteel and governments is harmonious. Even
the government of Guangdong have 10% share of the company, as for
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that, the policies of the government will support the development of
Baosteel. What’s more, Shanghai had sign a contract with Baosteel about
the joint development of Shanghai. So I think Baosteel can collaborate
with government and strive for positive policies beneficial for their
development.
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sph914MoSHuZHEQ0-Uyw6sdUQAq
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3W-1MaqQ1xKGxKWqBbmcEG
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A.html
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Made by: Gu qianning, Wang yidi, Zhang xinwen, Cai zhen.
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