TRADING PLATFORMS ANNOUNCED BY STEELMAKERS BUT WILL THEY WORK?
In recent days, both Shagang Group and Baosteel have
announced projects to build steel trading platforms to provide services which
are intended to improve the distribution mechanism. The mills have been under
pressure to find a quicker way to get their steel to market. The existing
process involves the large mills selling some of their material direct to major
customers but a significant proportion is sold to first tier traders who sell it
on to smaller traders and the process continues through more local dealers –
thus increasing handling before the material arrives at the user. This is
clearly inefficient and is also very costly.
This action will have been precipitated by the bankruptcy of some major traders
in recent times as market prices declined – thus creating losses for the mills.
MEPS contends that, with so much downward pressure on traders’ margins in the
last year, this is the ideal time to modify the outdated trading mechanism in
China. A change is overdue, particularly as the size of the market increased so
dramatically over the past twenty years. However, this will be just the first
step in the process of change.
It will not work if the only buyers concluding deals on the platform are the
same traders that are currently making purchases. The existing market mechanism
would then continue. Involvement of the end users of steel is essential if the
new process is to be a success. This requires a major rethink by the company
executives of the engineering and construction companies which use steel.
They will need to invest in warehousing facilities, order scheduling, materials
handling and all the other purchasing skills that accompany an efficient
procurement department. If the process of re-education and investment is not
carried out, the initiative will fail to provide the changes that are needed to
streamline the supply chain.
If it works well, the scheme will put the users of steel in direct contact with
the producers. This can create massive benefits for both sides in understanding
the problems of the other party. Lower stocks through the supply chain should
follow – leading to cost savings. Closer links should enable the mills to have a
greater understanding of the customers’ difficulties and assist in solving the
current problem of excess supply and investment in steelmaking.
Source: MEPS China
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