China Gerui comments on China's steel industry restructuring policy

"The planned restructuring of the steel industry places China Gerui in a beneficial position by regaining a much needed supply-demand equilibrium in the sector which would stabilize pricing over the long-run," said Mr. Mingwang Lu, Chairman and CEO of China Gerui. "We believe that as a high-end niche cold-rolled specialty steel producer, we will have the opportunity to enter new markets with improved raw material availability and cost structure which will ultimately result in improved gross margins over time."

China's 12th Five-Year Plan is emphasizing merger and acquisition activity in the steel industry to create larger, more efficient steel companies with a greater emphasis on high-end steel products. China's steel industry is the world's largest, but its estimated oversupply of approximately 100 to 200 million tons and fragmented structure has resulted in its inability to win pricing concessions from large international iron ore producers. Following the third Plenary Session of the 18th CPC Central Committee held in November 2013, China has accelerated its initiatives in restructuring the steel industry with the objective to reduce overall steel production capacity by 80 million tons before 2018. The government's determination has been evidenced by the recently announced capacity reduction in Hebei Province whose total output accounts for approximately twenty-five percent of the national output.

The Government's new policy is to merge smaller producers or to shut them down completely, which will also have the effect of strengthening the bargaining position of Chinese steel companies with the industry's large international iron ore raw material suppliers. It can be expected that as the steel supply-demand ratio moves into equilibrium, steel prices will recover from historical lows and combined with lower negotiated material costs, higher profitability and margins should result for remaining Chinese steel producers.

Further, according to China's Ministry of Information and Information Technology, approximately 400 million tons of steel producing capacity in China out of a total production capacity of 970 million never received full approval from the national Development and Reform Commission or fulfilled other legal requirements such as permission to access loans among other necessary requirements. It is likely that while some of this illegal capacity will be allowed to become legal, other operations will be terminated.

The planned consolidation of the steel industry is focused on the upper stream of the value chain, which will beneficially impact raw material suppliers to companies like China Gerui. The resulting higher raw material costs should eliminate low efficiency, poorly capitalized cold-rolled steel producers which would provide an opportunity for China Gerui to capture additional market share. With its high-technology, high-end cold- rolled steel products, the Company looks to be a beneficiary of the planned changesNew Arrivals