It is regarded as the most efficient Chinese steel producer and also the most cost effective. Baosteel boasts high economies of scale and a wide product offering, which includes specialization in high-end flat steel products.
Its products are primarily used in the domestic automobile, petrochemicals, machinery, paper and textile industries; but it also exports approximately 10% of its steel products to overseas markets, including eastern Asia, southeastern Asia, the Americas, Europe and Africa.
Battles over iron ore prices are the major threat to the company's success. But a continuation of high ore prices leading to the collapse of smaller producers could ultimately benefit Baosteel and China's other steel giants.
With high cash flows, a strong cash position and an international presence, Baosteel – recently streamlined after signing an agreement for strategic cooperation with Maanshan Iron & Steel – is perhaps the best placed of its peers to benefit from such M&A activity.
Though acquisitions are likely, a change of chairman has signaled a change in direction for the company. Having worked from a model based largely on capital expansion, it has now shifted to one that emphasizes technological development and product range enhancement.
The longer-term picture for the Chinese steel sector looks bright. Urbanization, which accounts for 80% of all steel consumed, is becoming increasingly steel intensive and shows no signs of slowing its frantic pace.
As supply and demand rebalance, Baosteel will be well placed to take advantage of future consumption growth and fulfill its goal of becoming one of the world's top three iron and steel producers by 2010.
China Shipping Development Co 600026.SS
With more than half of the domestic coastal oil shipping market and a 23% share of coastal coal shipping, China Shipping Development is in a strong position to capitalize on the country's insatiable demand for energy.
The company has over 400 vessels and a gross dead weight tonnage in excess of 8 million tons, ranking second in China. This has not stopped it announcing aggressive expansion plans, including the purchase of eight oil tankers in April for US$556 million, to enter operation between October 2007 and December 2009.
Ample cash reserves and a stable debt maturity structure also gives it the edge over smaller competitors as it studies potential takeover targets.
Furthermore, the company is protected from foreign competitors due to the strategic importance of energy and the government's "domestic oil transported by domestic companies" policy.
China Shipping Development is exposed to some risk, particularly the effect of oil pipeline transportation projects and the cyclical nature of growth in the shipping industry.
But the company has also shown an ability to handle cyclical fluctuations in the past, most notably during the shipping industry's 2001 slump, and soaring oil demand means shipping is unlikely to be replaced by new pipeline projects.
Though coastal oil shipping is its main revenue source, the company is also involved in oil ocean transportation and other dry bulk cargo shipment, including ores and fertilizers. The restructuring of its dry cargo business with its parent company China Shipping Group is ongoing. Once completed, these changes are expected to deliver increased revenues in the long-term, providing future earnings stability.
With a strong financial position, government protection, dominant market position and no foreseeable end to demand for its core energy transport business, China Shipping Development is coasting on smooth waters.