The client, a US based private equity firm, was in the process of setting up a fund to invest in the Chinese steel industry.
CRU Consulting was engaged to undertake a strategic review of the steel industry in China and to advise on the development of an ‘investment thesis’ for the fund.
CRU recommended potential investment platforms based on one or more generic ‘winning strategies’ following a review of both supply and demand side economics and macro and firm level analysis. These winning strategies were based on either ‘cost leadership’ and/or ‘product leadership/market proximity’ which we have identified to deliver superior financial performance in the medium and long term. We applied strategic selection criteria to the potential universe of over 200 steel mills and generated a short-list of candidate mills which potentially met the criteria for one or both of the investment platforms.
A key part of CRU’s approach was to develop a model to forecast Chinese steel demand at a provincial level, to identify current and future demand ‘clusters’. CRU forecasted steel demand by province (31 provinces), by end-use sector (8 sectors) and by product (10 products) through applying regional economic and sector growth rates, and steel intensities of key steel consuming sectors. This essential analysis identified the preferred locations of steel mills to potentially invest in under the “product leadership / market proximity” investment platform.
For the “cost leadership” investment platform, CRU’s proprietary steel cost model was used to identify which provinces, and hence mill locations, within China are structurally more cost competitive based on macro driven input costs such as raw materials, energy and labour costs specific to the province/region.
Finally, recognising the variation in social attitudes and working practices across China today, a provincial ‘resistance to change’ index was developed by CRU to enable worker attitudes and responsiveness to changes in strategy, business models and working practices resulting from new ownership, to be factored into the fund’s selection criteria.
CRU Consulting’s work enabled the client to rapidly gain a thorough understanding of the Chinese steel industry informed by both top down and bottom up analysis and our first hand, ‘on the ground’ understanding, enabled by our local presence in China.
It extended the client’s understanding of the market to a provincial level allowing them to objectively apply selection criteria, or ‘filters’, using comparable data and hence identifying candidate steel mills for investment with confidence.
Finally, CRU’s global perspective and understanding of how steel industries in other regions have developed and restructured over time, helped to further inform the client’s investment thesis for the prospective fund.Explore this case study with CRU