3. Preface
Over the past couple years, the global steel industry has undergone an unprecedented turbulence: 8
out of the global top 10 steel-producing nations fared a sharp decrease in crude steel output in 2009,
and over half of them shrank heavily. Being the global largest steel producer, China has stood against
the crush of financial crisis, achieved a two-digit growth in crude steel output as well as maintained the
whole industry's profitability by support of national policies and rigid market demands. However, the
old good days before 2007 are no longer with the industry. Looking forward, steel producers are facing
tremendous internal and external challenges: the changing competitive landscape, increasingly tougher
M&As and integration, demand instability, mounting material costs, pressure from the move towards a
low-carbon economy and rising environmental cost, as well as more stringent corporation governance
and regulatory requirements, all of which exert a lot of cost pressure on steel producers, even shaking the
leadership. Under such background findings, Deloitte co-authored this report with China Steel Industry
Development Research Institute (CSDRI) to inspire Chinese steel producers on taking initiatives in terms
of cost reduction, efficiency improvement and profitability management from the perspective of strategic
cost management.
Strategic cost management for steel companies: Building competitive edge through cost reduction 1
4. Chinese steel producers need cost
and profitability management
The world's total crude steel production was 1.22
billion tons in 2009, with about 47% taken by
China for its 570 million tons outputs. Chinese steel
producers took up 38 seats among the World Steel
Association's list of top 80 large steel producers
with capacity above 3 million tons; 5 seats among
the global top 10 steel producers, as well as 9 seats
among the top 20 producers with 10 million tons
capacity. The above statistics indicate that Chinese
steel producers have played a significant role in the
global steel industry. However, the major powers
really dominating global steel industry are still those
world-class multinational steel producers overseas,
and the majority of China's individual steel
producers still have weaker position over the global
arena. In addition to the lack of raw materials,
partially, part of outdated production facilities,
inadequate technical innovation, mid and low-end
products and un-rationalized sales channels, other
causes such as the over-expanded operation and
less focused management as well as low margin
also attributed to this.
According to CSDRI's analysis, the top 20 foreign
steel producers in 2007 maintained an average
pre-tax profit margin of 12%, while the figure of
China's counterparts was merely around 6-7%.
In the 4th quarter of 2008, as the international
financial crisis broke out, both domestic and
foreign steel producers encountered tremendous
impact: the average pre-tax profit margin of major
foreign large steel producers per annum dropped
to 10.5%, while the China counterparts dropped
to 3.1% (Figure 1). That is to say, before the
international financial crisis broke out, foreign steel
producers maintained comparative advantages in
costs and higher profits than domestic peers.
Along with the global pervasion of economic crisis
in 2009, the major large foreign and domestic
steel producers made cutbacks as a result of the
shrink in market demand and sales, with annual
profit level slumping to the lowest. In 2009, the
average pre-tax profit margin of global major large
steel producers was -3.9% with losses occurred
(Figure 2). Chinese steel producers also faced up
with similar external environment and challenges;
however, thanks to the support of national
policies and rigid demands from domestic market,
2
Figure1. The comparison of pre-tax profit margin among domestic and foreign large
steel producers, 2008（Notes 1 and 3）
15
15.0
12
9
10.5
9.6
6
3
0
5.9
3.1
1.0
Average
Highest
Lowest
Average
Highest
Lowest
Pre-tax profit margin of domestic steel producers (%)
Pre-tax profit margin of foreign steel producers (%)
Figure2. The comparison of pre-tax profit margin among domestic and foreign large
steel producers, 2009 (Notes 1 and 4)
20
15
10
10.1
7.6
5
0
1.1
3.2
-3.9
-5
-10
-15
-20
-16.7
Average
Highest
Lowest
Average
Pre-tax profit margin of domestic steel producers (%)
Pre-tax profit margin of foreign steel producers (%)
Highest
Lowest
5. 12
90
10
85
8
80
6
75
Pre-tax margin (%)
95
4
70
*
09
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
20
98
19
97
Cost ratio
19
19
19
19
19
96
0
95
60
94
2
93
65
19
However, it is a fact that Chinese steel industry
underwent a profitability decrease in 2008 and
2009. Despite various economic protection policies
and the decreased production cost due to the
decreased purchasing price of iron ores compared
to 2008, the average pretax profit margin of
major domestic large and medium steel producers
dropped to 2% (Figure 3), the lowest point ever
since 2000. As another matter to be concerned, a
10.1% pre-tax profit margin was still been achieved
by some world-class producers overseas (Figure
2) in 2009, overtopping Chinese steel producers.
This represents that foreign steel producers'
competitive advantages still exist despite the shortterm setbacks. In virtue of the mature cost and
profitability management, they will bring forth a
new round of fiercer competition and challenges
to Chinese peers as the economy recovers. As
a matter of fact, in order to adapt to the everchanging economic environment, accumulate
long-term competitive advantages and rank among
the world-class producers, the majority of Chinese
steel producers have to exert persistent efforts in
a longer term to pursue operation efficiency and
profitability management. Otherwise, they will
encounter great difficulties to sustain the profit
growth in the long run.
Figure3. Developing trends of the pre-tax profit margin and cost ratio of domestic large
and middle sized steel producers in recent years（Notes 1 and 2）
Cost ratio (%)
the extensive losses did not occur to the whole
industry. According to CSDRI's analytical statistics,
the 9 Chinese steel producers ranking in the global
top 20 achieved a 3.2% average pre-tax profit
margin in 2009 (Figure 2). That is to say, in 2009,
Chinese steel producers exceeded foreign peers in
the overall performance.
Pre-tax profit margin
* Estimated figure for 2009
Strategic cost management for steel companies: Building competitive edge through cost reduction 3
6. Key approaches for cost and
profitability management for
Chinese steel producers
In perspective of the ability to create enterprise
value, cost ratio represents mainly the raw material
cost and production efficiency, while the periodic
expense ratio represents mainly the enterprises'
management efficiency in sales, management
and financing except production. Compared to
the performance of large domestic and foreign
steel producers, in 2009, Chinese steel producers
achieved an average cost ratio of 90.9%, ahead
of the average 92.7% of foreign peers (Figure
4). However, the best performance among
foreign peers is 84.2%, better than Chinese steel
producers' 85.8%. With regards to periodic
expense ratio, Chinese and foreign steel producers
are both around 8%, with the best level being
merely about 3% (Figure 5). However, despite the
sharp decrease in sales, we didn't see obvious
increase for the period expense ratio of foreign
steel producers, which is largely attributed to their
efficiency and profitability oriented management.
In general, the average operation cost ratio of
Chinese steel producers in 2009 is 98.7% (Figure
6), ahead of foreign peers. While the year's best
performance of operation cost ratio is 89.5%,
maintained by foreign peers.
Here we compare the performance of 9 Chinese
steel producers among the world top 20 with
capacity over 10 million tons, without taking
account of the international variance factors.
According to CSDRI's analysis, Jiangsu Shagang
Group achieved the best periodic expense ratio of
3%; while Baosteel Group presented the lowest
operation cost ratio of 96%, the best performance
in overall operation cost management due to its
strong and solid overall advantages. Taking the
above as a whole, in perspective of profitability,
Baosteel achieved the highest 7.6% in pre-tax
margin rate, and also ranked the first place for
comprehensive competence among domestic steel
producers, in virtue of its sound return on assets
and considerable profits, well-performed current
asset structure and large industrial scale and
impact in 2009.
4
Figure 4. Comparison of cost ratio among large domestic and
foreign steel producers（Notes 1, 4 and 5）
120
105.0
100
90.9
94.8
92.7
85.8
86.1
81.6
84.2
80
66.1
60
40
20
0
Average
Highest
Lowest
Average
Highest
Lowest
Cost ratio in 2009 of domestic steel producers (%)
Cost ratio in 2009 of foreign steel producers (%)
Cost ratio in 2008 of foreign steel producers (%)
Figure 5. Comparison of period expense ratio among large domestic and
foreign steel producers（Notes 1, 4 and 5）
20
15.3
15
13.0
9.6
10
7.9
7.7
6.0
5
3.0
3.1
3.0
0
Average
Highest
Lowest
Average
Period expense ratio in 2009 of domestic steel producers (%)
Period expense ratio in 2009 of foreign steel producers (%)
Period expense ratio in 2008 of foreign steel producers (%)
Highest
Lowest
7. These ratios represent the successes achieved by
those steel producers in various aspects, which
provide lesson learnt for Chinese steel producers on
management, covering cost reduction, efficiency
development, improvement in profitability and
return on assets. Based on Deloitte's experience in
strategic cost management and the understanding
of major cost and profit drivers, Chinese
steel producers may consider the following 5
approaches when developing cost and profitability
management with higher level of maturity and
sustainability:
1. Integrate business and operation model by
rationalizing products, customers and services
2. Strengthen the operation governance, and M&A
integration
3. Improve the level of integration and efficiency
in operation processes (ex. purchasing and
production processes)
Figure 6. Comparison of operating cost ratio (OCR) among large domestic and
foreign steel manufacturer（Notes 1, 4 and 5）
116.5
120
100
98.7
101.7
96.0
100.3
87.6
92.8
80
89.5
74.7
60
40
20
0
Average
Highest
Lowest
Average
Highest
Lowest
Operating cost ratio in 2009 of domestic steel producers (%)
Operating cost ratio in 2009 of foreign steel producers (%)
Operating cost ratio in 2008 of foreign steel producers (%)
4. Persistently control expenses and cash receipts
and payments, and
5. Establish a consistent cost management
mechanism and information system
Strategic cost management for steel companies: Building competitive edge through cost reduction 5
8. Integrate business and operation model
by rationalizing products, customers
and services
A key indicator to measure the "rationale" of
business model is the Return on Assets (ROA). In
2009, Chinese steel producers achieved a ROA of
2%, exceeding the average performance of foreign
peers; however, the best performance of domestic
enterprise is 3.8%, far short of the foreign peer's
7.7% (Figure 7).
In general, foreign steel producers tend to
modify their business and operation model by
rationalizing products, customers and service
offerings. The "rationalization" by differentiated
modification approaches on product pricing,
customer management and service level will
strategically achieve a more effective allocation
of resources, so as to establish the profit model.
Whereas, such decision-makings have to be based
on the long-term and accurate knowledge on
product and customer costs, profit information,
and the penetration into the reasons behind the
facts, which is exactly the bottleneck faced by
many Chinese steel producers. The less delicate
cost accounting is unable to support the product
projects and customer life cycle management,
including the collection, calculation and reporting
of comprehensive cost information of sales,
manufacturing and services.
Deloitte's research found that with effective
and integrated sales plan, inventory and supply
& demand plans as well as the optimized
management on operating capital (including
accounts payable, accounts receivable, inventory),
as high as 40-50% of forecast errors has been
reduced, and 10-30% inventory lowered, which
naturally contributed to cash flow optimization.
Besides, other two critical components in cost
and profitability management are to establish the
key performance indicators fit for profit model,
and rationalize the cost structure. According to
Deloitte's research, the adjustment on business
model and the optimization of a rationalized cost
structure will produce about 10-30% savings in
effectiveness.
6
In China, Jiangsu Shagang Group and Baosteel
Group are proven cases in this area. They achieved
a respective 3.8% and 3.7% of ROA (Notes 2). One
of the key reasons to this is that they adopted the
business model optimization at varying degrees.
Take Shagang Group for instance. In recent years,
the Group was persisting in technological and
independent innovation and gave full play to
the advantages of technical talents, advanced
technologies and devices, with a view to focus
on developing high-tech and high value-added
products such as hot rolled coils, wide thick plates
and high-quality wire rods. With their success in
developing high-end products and optimization
of product structure, the profitability of Shagang
Group was boosted.
The CSDRI's analysis demonstrates that under a
unified strategic planning, Baosteel Group has
well defined its subsidiaries' product portfolio,
based on the strategy's overall requirements and
all subsidiaries' specific geographies, management
and technical characteristics. For instance, Baosteel
Group Shanghai No. 1 Iron & Steel Co. Ltd. has
achieved the production transformation from
low technical and low value-added plain carbon
steel sectional materials and medium plates to
high technical and high value-added stainless
steel, low-alloy steel and carbon steel plates and
strips; Pudong Iron & Steel Co. Ltd. is placed to
produce ship plates and special plates; Baosteel
Group Shanghai No. 5 Steel Co., Ltd. fully exited
the production of plain carbon steel and began
9. to concentrate on development of special steel,
positioning itself to competitive special steels
led by high-grade bearing steel, refractory alloy
and titanium alloy, etc. In regions of Yangtze
River Delta and Pearl River Delta, the production
concentrates on high-end plates so as to meet
the fast growing demand of auto, household
appliances and shipbuilding industries within these
areas; for Northwestern areas, Baosteel Group
Xinjiang Bayi Iron & Steel Co., Ltd. ("Xinjiang
Bayi") concentrates on development of long
products and pipe work pieces to meet the steel
demand of construction and petroleum drilling,
driven by western development initiative and
energy exploitation. Meanwhile, it also covers the
production of hot rolled sheet and medium plates,
etc., thereby to become the most competitive
steel manufacturer in western regions. In virtue of
the above rationalizationon industrial layout and
product structure, Baosteel Group has achieved a
significant growth in return on assets.
Figure 7. Comparison of the return on assets (ROA) among large domestic and
foreign steel producers (Notes 1, 4 and 5)
30
26.2
25
20
15
11.7
10
7.7
5.6
3.8
5
2.0
0.6
0
-11.7
-1.8
-5
-10
-15
Average
Highest
Lowest
Average
Highest
Lowest
ROA in 2009 of domestic steel producers (%)
ROA in 2009 of foreign steel producers (%)
ROA in 2008 of foreign steel producers (%)
Strategic cost management for steel companies: Building competitive edge through cost reduction 7
10. Strengthen the operation governance
and M&A integration
According to Deloitte's research, 10-25% of
enterprises' cost optimization is derived from the
improvement on the enterprise governance and
organizational structure of their affiliates, e.g.
centralization of procurement, establishment of
shared service centers and R&D centers, as well
as further optimization of the plant layout. The
benefits from the improvement include reducing
the production management costs by 5-15%,
shortening processing cycle of purchase order
by 8-16 days, increasing the turnover times of
raw materials by 26-52, decreasing the product
development cycle by 50%, and cutting down
30% of R&D project costs. In addition, the
efficiency of supporting functions is also enhanced
due to shared services.
As decentralized order handling process caused
too much turnaround, through the design and
establishment of a centralized customer order
processing center, a foreign steel company
reduced order processing costs by over 12%
and average order processing time by over 15%.
In China, Baosteel Group is the best practice to
cut down management expenses and enhance
operation governance on business operation
and risks, through management integration (e.g.
the comprehensive integration of information,
technologies and systems at the company level,
and build B2B e-trading platform at Bsteel.
com.cn) as well as the establishment of finance
shared service center. Without any doubt, these
optimization measures greatly improved the
standardization, automation and information
quality of Baosteel Group, and maintained its
competitive edge in cost and price in domestic
and international markets. In another example,
Jiangsu Shagang Group has significantly reduced
its operating costs and achieved positive efficiency
by streamlining organizational structure and
abridging management hierarchy through reducing
intermediate management sections.
8
Moreover, large-scale M&A activities in China
steel industry started from 2005, i.e. after the
launch of Development Policies for the Iron &
Steel Industry. Those enterprises that had M&As
and restructurings with assets integration included
Angang Steel and Ben Xi Iron & Steel; Wuhan
Iron & Steel and Echeng Iron & Steel, Kun Steel,
Liuzhou Steel; Baosteel and Xinjiang Bayi; Shagang
and Yonggang; Taiyuan Iron & Steel and Shanxi
Xinlingang Steel; Pangang and Chengdu Iron &
Steel. Following suit of Arcelor Mittal, the world’s
top steel producer, Beijing Jianlong Heavy Industry
Group, a private steel producer, conducted
low-cost mergers towards state-owned enterprises
and downstream industry. Year 2008 is said being
"the year of Integration” for China’s steel industry,
as a serial of newly consolidated steel producers
consecutively emerged – including Shandong
Iron and Steel Group, Hebei Iron and Steel Group,
Guangdong Iron and Steel Group, Guangxi Iron
and Steel Group. Although M&As are often taken
by Chinese steel producers as an approach to
reduce cost and enhance efficiency, it is time for
them to think about that after a series of M&A
myths: has the synergy in terms of cost reduction
and efficiency enhancement been actually
achieved as expected?
11. CSDRI's research shows that Baosteel Group,
Shagang Group and Shandong Iron and Steel
Group are typical cases among a series of M&As
during recent years. In 2007 and 2008, Baosteel
restructured Xinjiang Bayi and Guangzhou Iron
and Steel Group. By relatively thorough integration
of these invested steel mills on production,
supply chain and human resources, Baosteel
Group achieved advantage complement and
scale economy in resources and technologies,
including cost advantages in terms of purchase
of raw materials, product distribution, sales, R&D,
and overhead expenses. Jiangsu Shagang Group
initiated M&A strategy in the second half of 2006
and subsequently acquired Jiangsu Huaigang,
Henan Yongxing, Xinrui Special Steel, and Jiangsu
Yonggang, with the Group’s capacity up by 10
million tons. By transforming and managing the
acquired enterprises, the Group increased its scale
economy and competitiveness. The founding of
Shangdong Iron and Steel Group originated from
the merger and restructuring between Jigang
Group and Laigang Group in 2008. After the
merger, Shandong Iron and Steel Group centralized
its treasury management, procurement, sales
and operation coordination so as to build up a
preliminarily unified operation platform. Through
this series of substantial restructurings, the
advantages of scale and concentrated operation
began to emerge. In another case, Hebei Iron and
Steel Group conducted centralized financing after
the integration, which transformed the up floating
interest rate under original scattered status into
down floating interest rate under centralized credit
authorization, saving interest of RMB300 million
in one year (Notes 2). That is also the successful
experience for reducing cost and enhancing
efficiency through M&As. Nevertheless, steel
producers that intend to reduce cost and enhance
efficiency through M&As should conduct a series
of effective integration after M&As. Therefore,
the effect of cost reduction and efficiency
enhancement after M&As might not be reflected
within a short term, as many integration measures
have not been thoroughly implemented within a
short period.
Strategic cost management for steel companies: Building competitive edge through cost reduction 9
12. Improve the level of integration and
efficiency in operation processes
In terms of the integration and efficiency in
operation processes, especially in purchase and
production, Anben Iron and Steel Group and
Baosteel Group are the pioneers. Their cost ratios
are relatively low at 86%-88%, among domestic
steel producers. (Note 2)
To achieve breakthrough in the integration
and efficiency in the purchase and production,
foreign steel producers usually concentrate on
traditional issues such as vertical integration,
lean production, improvement of efficiency on
production equipments, distribution models and
transportation speed, as well as emerging issues
including the development of lean suppliers and
outsourcing. According to Deloitte's research, the
positive effects of these breakthroughs include
40% decrease of processing cost, increased
utilization ratio of fixed assets, 5-10% decrease of
labor cost (including 20% decrease of labor cost
for product repair), reduction of waste and rework
cost to 1.5% of the total cost, 50%-75% decrease
of urgent order cost, 20% decrease of logistics
cost, and 20% decrease of materials in transit.
These considerable profits directly facilitate the
enterprises to create value.
Take a steel producer in North America for
example, due to the requirement from its
automobile customers to cut down the price of its
major iron and steel products, the management
faced the pressure of decreasing profits. Particularly
dissatisfied with the progress of operation
efficiency, the management decided to evaluate
the operation process to identify cost optimization
opportunities and implementation accordingly.
10
The enterprise said these measures reduced over
13% of the cost within the improvement scope.
The company reduced machine shutdown time
and maintenance cost through analysis and
revision of maintenance process; reduced over
12% of maintenance costs, over 18% of labor
shutdown cost caused by inventory flow and over
15% of customer service management cost by
strengthening business process and labor skills;
cut off more than 300 indirect material suppliers
to increase the purchase price negotiation ability
and decrease transaction expenses, saving around
15% of procurement cost of indirect materials;
enhanced product price negotiation ability and
abandoned some customers that may not provide
profits, through optimization management on the
profit information of the products and customers.
As for the costs of main material inputs before
iron making to domestic iron and steel producers,
e.g. coking coal, coal injection, metallurgical coke,
concentrate fines, imported rich ore fines, pig
iron and hot metal, the company’s geographical
location, transportation conditions, self-owned
mine and self supply, the ratio of the ores from
long-term purchase agreement are determinant
elements to procurement cost. Of course, to
a certain extent, procurement cost reflects
the procurement efficiency of the company. A
successful case is Baosteel Group's acquisition of
Xinjiang Bayi, which has rich resources like coals
and iron ores and geographical advantages with
favorable development potential. Relying on
Baosteel’s advantages in technologies, talents,
management and marketing, the integration of
Baosteel and Xinjiang Bayi promoted the efficiency
in the purchase and production. Compared with
the average unit procurement cost of large-andmiddle-sized steel producers in China, Baosteel
Group reduced the externally purchased material
cost in 2009, saving RMB1140 million of coking
coal and RMB700 million of coal injection. (Notes 2)
13. In the production cycle (including the
manufacturing stages i.e. before iron making,
iron making, steel making, finished iron rolling),
the cost control depends mostly on technological
equipments, production craft and manufacturing
management in each production process. The
research of CSDRI shows that during the period of
11th Five-Year Plan, Anben Iron and Steel Group
conducted massive technology transformation
on steel plants and comprehensive upgrade of
main equipments and strengthened production
management and quality control, enabling the
Group’s production craft and technological
equipments reaching worldwide advanced level,
which greatly reduced the production costs in iron
and steel making and continuous casting process.
Take the main outputs of this process (plain carbon
casting billets and slabs) for instance, under the
situation that procurement cost of raw materials
had no significant advantages, the production cost
per unit of plain carbon casting billets and of slabs
by Anben Iron and Steel Group were 2% and 4%
lower than the average industry level respectively,
saving considerable costs for the group.
As regards to Hebei Iron and Steel Group, its
procurement cost of raw materials had no
advantages; however, the Group also remarkably
saved the production cost per unit, by upgrading
production equipments, strengthening
technological flow control, optimizing
technological parameters of product lines, as well
as refining key index to support lean production.
For example, in 2009, the unit production cost of
non-alloy steel (Note 7) products was lower than
average industry level. The production costs per
unit of high speed wire, Grade II reinforcing bar,
Grade III reinforcing bar, plain carbon round bar,
plain carbon medium plate, plain carbon hot-rolled
coil were 1-9% lower than their respective average
industry level, saving considerable costs for the
Group (Note 2).
In general, based on CSDRI's analysis, the cost
ratio of China’s steel industry (including main raw
materials, supporting materials, fuels and powers,
direct labor cost, and manufacturing expense) is
between 85-90%, varied by product structures.
The cost composition is, approximately, 59% for
materials, 32% for energy, 2% for labor, 6% for
equipment utilization such as depreciation, repair,
spare parts and machinery consumables, and
1% for incidental expenses of transportation and
administration.
Strategic cost management for steel companies: Building competitive edge through cost reduction 11
14. Persistently control expenses and
cash receipts and payments
Figure 8. Comparison of selling expense ratios among large Chinese steel producers
in 2009 (Notes 1, 4 and 6)
Selling expense ratio (%)
5
4
3
2
1.9
1
0
1.1
Average
Highest
0.4
Lowest
Figure 9. Comparison of general & administrative expense ratios among large
Chinese steel producers in 2009 (Notes 1, 4 and 6)
15
Overhead expense ratio (%)
By comparing large Chinese steel producers'
performance, we found that in 2009, Masteel
Group has the lowest selling expense ratio, only
0.4% (Figure 8); Shagang Group has the lowest
general & administrative expense ratio, about 1.4%
(Figure 9); and Baosteel Group has the lowest
financial expense ratio, 0.8% (Figure 10). On the
whole, in terms of period expenses, Shagang
Group excelled itself from its peers. As a result
of its economical budget and strict control over
expenditure, Shagang Group's period expense
ratio was only 3% in 2009 (Figure 5), more than
50% lower than 7.9% of the industrial average.
Shagang Group provides a reference for its
domestic peers.
According to the analysis of CSDRI, in Chinese steel
industry, the ratio of periodic expenses (including
selling, general & administrative and financial
expenses) that affects manufacturers' operational
profits remains around 6%, of which 1% is selling
expenses, 3.5% being general & administrative
expenses, and the remained 1.5% being financial
expenses.
12.1
10
5
5.0
0
1.4
Average
Highest
Lowest
Figure 10. Comparison of financial expense ratios among large Chinese steel producers
in 2009 (Notes 1, 4 and 6)
5
Financial expense ratio (%)
The control of the three items of periodic
expenses, namely selling, general & administrative
and financial expenses, mainly depends on the
enhanced efficiency and scale of sales, overheads
and financing and on the enhanced control
of cash receipts and payments. Take selling
expenses for example. With regard to the topic
of cost management, the external expenses such
as advertisement and promotional expenses
are often the most controversial ones, mainly
because of their expense nature - not driven by
the improvement needs of operating efficiency,
but depending on management's professional
judgment when making operation decision.
Other factors include the large amount involved
and the difficulty to calculate the opportunity
cost. Current practices mostly rely on ex ante
assessments on benefits, but lack grounds for
quantifying the effect. When manufacturers are
under great cost pressure, such expenses are easily
reduced although such reduction might cause
adverse effects. Accordingly, Deloitte advises steel
producers, pursuant to their strategic objectives,
to make good planning for the expenses and cash
receipts and payments from budgeting stage, and
exert strict control over consistently, whether under
favorable or adverse economic environment. Only
in this way, can the steel producers maintain a
certain capacity and capability to prevent profit slip
in different economic environments.
4
3
2.7
2
1
1.7
0.8
0
12
Average
Highest
Lowest
15. Establish a consistent cost
management mechanism and
information system
Chinese enterprises customarily take costs as their
competitive edge. In comparison with the cost
management system of foreign steel producers,
however, the managements of Chinese enterprises
are still dissatisfied with their current cost
information and analyses, mainly because they are
facing the following challenges:
1. Dis-linkage of cost measurement from operating
efficiency performance, resulting in timely less
information providing ;
2. Dis-linkage of cost measurement from strategy
initiatives, resulting in the constrain of valueadded information;
3. Cost reporting is mostly inclined to financial
reporting purpose, without effective refection
of operation performance and business
achievement;
In relative terms, considering the major
challenges Chinese steel producers are facing
when making more precise product costs and
profitability analysis, it is vital for them to build
an integrated cost management mechanism and
information system. Specific areas in which steel
producers can make improvements or changes
include: connecting cost measurement with the
measurement of operating efficiency and operating
strategies; integrating cost and performance
reporting; and acquiring a more comprehensive
view about the cost (including hidden costs such
as quality cost, R&D cost, distribution cost and
customer service cost) by tracking the causes of
cost incurrence (cost drivers) and establishing
reasonable costing models for allocating total costs
to product items and individual customers.
4. Focusing on the subdivision of cost elements
instead of tracking to the cost drivers;
5. Lack of logical models for allocating total costs
to product items and individual customers; and
6. Failure to extend the focus on costs from
manufacturing costs to hidden costs such as
quality cost, R&D cost, distribution cost and
customer service cost.
According to the findings of Deloitte's research
on a steel producer in the North America, its false
cost accounting resulted in 24% of distorted
product costs and profit information in its financial
statements. Try to imagine that how significant
unfavorable effects such distortion would generate
in the decision of business portfolio, pricing and
investment. It is exactly a loss of competitive edge.
The key to make improvements is to perform more
accurate analyses of product costs and profitability
by means of operational activity and cost driverbased allocation.
Strategic cost management for steel companies: Building competitive edge through cost reduction 13
16. Conclusion
According to the analysis above, to achieve a more
precise cost and profitability management, Chinese
steel producers shall take the following actions:
1. Integrate business and operation model
by rationalizing products, customers and
services
Steel producers shall integrate the business
and operation models by rationalization of
products, customers and services. Through
product pricing, customer management
and differential adjustment of service levels,
"rationalization" enables resources allocation to
become more strategically effective and helps
steel producers to build a precise profitability
management model.
2. Strengthen the operation governance and
M&A integration
Cost optimization can be achieved through
enhancement on operation governance
and organizational structure of the affiliated
enterprises, e.g. to adopt centralized
purchasing, establish shared service centers and
R&D centers or further optimize the facilities
layout. In addition, steel producers intending to
expand business scale, reduce costs, increase
efficiency and improve competitive edge
through M&As, will have to take a series of
effective post merger integration actions to
achieve the expected effects.
3. Improve the level of integration and
efficiency in purchasing and production
process
As for optimizing the efficiency in purchase
and production process, the breakthrough
of enhancing operating efficiency mainly
centers around topics including vertical
integration, lean production, efficiency of
production equipment, distribution models
and transportation speed, development of lean
suppliers and outsourcing.
14
4. Persistently control expenses and cash
receipts and payments
Steel producers, pursuant to their strategic
objectives, shall make good planning for the
expenses and cash receipts and payments from
budgeting stage, and exert strict control over
them consistently, whether under favorable or
adverse economic environment. Only in this
way, can the steel producers maintain a certain
capacity to prevent profit slip in different
economic environments.
5. Establish an integrated cost management
mechanism and information system
Steel producers shall integrate their cost
and information systems to drive their cost
management and profitability analysis.
Specific areas in which steel producers can
make improvements or changes include: link
cost measurement with the measurement of
operating efficiency and operating strategies;
integrating cost and performance reporting;
and acquiring a more comprehensive view
about the cost (including hidden costs such as
quality cost, R&D cost, distribution cost and
customer service cost) by tracking the causes of
cost incurrence (cost drivers) and establishing
reasonable costing models for allocating
total costs to product items and individual
customers.
17. The improvement needs vary among steel
producers, depending on the pressure level they
are facing and on the changes in need on the
basis of their own requirements. We believe that
an effective cost and profitability management
plan shall be a multi-level one incorporating
short, mid and long term considerations. A fourphase cost improvement approach- building a
cost baseline, quantifying and evaluating cost
saving opportunities, developing a cost reduction
proposal and implementing action scheme (Figure
11) – can well enable steel producers to benefit
in both short and long run, and produce a greater
and longer effect than the mandatory cost
reduction.
Figure 11. Deloitte's Methodology to Develop Enterprise Cost Improvement Roadmap
Typical Work Scope
Pre-launch
Stage 1:Establish baseline, quantifying
and evaluating cost saving opportunities
Phase 1
Phase 2
Data request
Baseline cost model
Opportunity
assessment
High-level
Work plan
Service delivery
model analysis
Prioritize
opportunities
Initial change
management plan
Initial
organizational model
Phase 3
Recommendation for
prioritized opportunities
Opportunity selection process
Key deliverables
Stage 2: Propose cost reduction suggestions
and implementation road map
Stage 3:
Implementation
Phase 4
Action plans
in key areas
Quantified
savings & costs
Performance mgmt,
indicators & tools
Defined
organizational model
Defined change
mgmt plan
Implementation
in stages,
providing both
quick wins /
immediate
savings and
longer term,
transformation
al change.
Benefits are
measured and
tracked –
accountability is
reinforced at
the corporate,
business unit,
and functional
levels.
Strategic cost management for steel companies: Building competitive edge through cost reduction 15
18. Notes
Note 1:
Pre-tax profit margin = pretax profit/revenue
Cost ratio = cost of sales/revenue
Selling expense ratio = sales expense/revenue
General & administrative expense ratio = General &
administrative expense /revenue
Financial expense ratio = financial expense /
revenue
Period expense ratio = (selling expense + General
& administrative expense + financial expense) /
revenue
Operating cost ratio = (cost of sales + period
expenses) /revenue
Return on assets = pretax profit/average value of
total assets of current year
Note 2:
Source: Analysis of CSDRI
Note 3:
Data of 2008 (CSDRI analysis for domestic steel
producers and annual report of each companypublished on company website- for foreign steel
producers):
Domestic steel producers refer to 10 large Chinese
steel producers, including Baosteel Group, Wuhan
Iron and Steel Group, and Anben Iron and Steel
Group etc.
Foreign steel producers refer to 8 large steel
producers, including ArcelorMittal, POSCO, and
Nippon Steel Corporation etc.
Note 4:
Data of FY2009 (CSDRI analysis for domestic steel
producers and annual report of each companypublished on company website- for foreign steel
producers):
Domestic steel producers: the 9 Chinese steel
producers which were listed among the global
top20 steel producers- Hebei Iron & Steel Group,
Baosteel Group, Wuhan Iron and Steel Group,
Anben Iron and Steel Group, Jiangsu Shagang
Group, Shandong Iron and Steel Group, Shougang
Group, Masteel Group, and Hunan Valin Iron and
Steel Group
Foreign steel producers: 8 of the global top20 steel
producers - ArcelorMittal, POSCO, Nippon Steel
Corporation, JFE Steel Corporation, OAO Severstal,
Evraz Group, U.S. Steel, and Nucor Corporation
16
Note 5:
The 2008 data of foreign steel producers include
those 8 companies listed in Note 4 and listed for
reference only
Note 6:
Due to the different disclosure requirements under
different financial reporting standards, the specific
amounts of selling, general and administrative,
financial expenses are not completely split.
However, the total amounts of period expenses
have been shown in Figure 5.
Note 7:
The product structure varies from one steel
producer to another. Moreover, in terms of
difficulty in production and technology, quality
and performance features, proportions of alloy
elements, and final values, low alloy steel products
and high alloy steel products of various types and
notations are quite different and incomparable. In
this Report, therefore, to avoid false conclusion, we
did not compare unit manufacture costs of steel
making, billet casting and rolling of finished steel
products among steel producers by plain carbon
steel and alloy steel or by physical appearancebased traditional classification (plate, pipe, thread,
belt, wire and bar). In the comparative analysis of
unit manufacture costs, we compare, not low alloy
steel and high alloy steel, but only plain carbon
steel products that are relatively comparable in
the entire process, including continuous casting
billets and slabs, wire, Grade II bars, Grade III bars,
medium plates, medium-thickness wide belts,
HR&W strips, and CR&W strips.
19. Contacts
Deloitte China
Norman Sze
Managing Partner
Consulting
Tel: +86 21 6141 2388
Email: normansze@deloitte.com
Rosa Yang
China Manufacturing Industry Leader
Partner
Enterprise Risk Services
Tel: +86 21 6141 1578
Email: royang@deloitte.com
Denken Meng
Partner
Consulting
Tel: +86 10 8520 7811
Email: denmeng@deloitte.com
Annie Chen
Director
Consulting
Tel: +86 21 6141 2236
Email: anniechen@deloitte.com
Maggie Yang
Director
Consulting
Tel: +86 10 8520 7822
Email: megyang@deloitte.com.cn
Yu Yun
Director
Consulting
Tel: +86 10 8520 7825
Email: yyu@deloitte.com.cn
China Steel Industry Development Research Institute (CSDRI)
China Steel Industry Development Research Institute (CSDRI), an institute established in 1979 as approved
by the State Council, was initially affiliated directly to the former Ministry of Metallurgical Industry; from
2002 administered by the State Economic and Trade Commission, and from 2004 administered by the State
Council's State-owned Assets Supervision and Administration Commission, which authorized China Iron
and Steel Association (CISA) to exercise the power on its behalf. The institute provides research & consulting
services, and edit and publish industry publications. Specifically, the research &consulting services are mainly
engaged in researches of steel industry and the costs, finance, investment, technology, competitiveness,
development strategies, and reform and management of steel producers as well as the analysis of industry
trends. Over the years, appointed by governmental departments including the National Development and
Reform Commission, the Ministry of Finance, the Ministry of Commerce and the Ministry of Industry and
Information Technology, we have completed dozens of decision making-support research topics regarding
industry policies. In addition, we also provide consulting services for financial institutions and steel
producers. Our publications consist of China Steel Yearbook (Chinese and English versions available), China
Steel Trade Yearbook, China Steel Focus (periodical) and Metallurgical Financial Accounting (periodical).
Dr. Liu Haimin
Deputy Director
Tel: +86 10 6526 1130
China Steel Development Research Institute
Strategic cost management for steel companies: Building competitive edge through cost reduction 17
