Identifier
Created
Classification
Origin
05TAIPEI136
2005-01-14 01:00:00
CONFIDENTIAL
American Institute Taiwan, Taipei
Cable title:  

STEEL AND CEMENT - DEEPENING CROSS-STRAIT ECONOMIC

Tags:  ECON ETRD EINV PREL CH TW 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 000136 

SIPDIS

DEPT FOR EAP/TC
DEPT PLEASE PASS AIT/W

E.O. 12958: DECL: 01/15/2015
TAGS: ECON ETRD EINV PREL CH TW
SUBJECT: STEEL AND CEMENT - DEEPENING CROSS-STRAIT ECONOMIC
INTEGRATION?

REF: 04 TAIPEI 3406

Classified By: AIT Director Douglas H. Paal, Reason 1.4 (b/d)

Summary
-------

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 000136

SIPDIS

DEPT FOR EAP/TC
DEPT PLEASE PASS AIT/W

E.O. 12958: DECL: 01/15/2015
TAGS: ECON ETRD EINV PREL CH TW
SUBJECT: STEEL AND CEMENT - DEEPENING CROSS-STRAIT ECONOMIC
INTEGRATION?

REF: 04 TAIPEI 3406

Classified By: AIT Director Douglas H. Paal, Reason 1.4 (b/d)

Summary
--------------


1. (C) Taiwan,s steel industry is exporting a large portion
of its output to the PRC, accounting for as much as 50
percent of Taiwan,s steel exports. As is the case for many
other Taiwan exports to the Mainland, Taiwan steel is mainly
used to manufacture consumer goods for re-export to markets
in the U.S., Japan and Europe. However, Taiwan,s cement
industry is investing in Mainland manufacturing facilities
aimed at taking advantage of the PRC,s growing domestic
cement market. As much as 25 percent of the output of
Taiwan,s cement firms is produced in the Mainland, primarily
for use in the PRC. Taiwan,s cement industry is currently
one exception, and more industries will likely follow and
come to increasingly rely on the internal PRC market to
purchase Taiwan exports and the output of Taiwan-owned
manufacturing facilities in the PRC. More profound economic
integration will increase Taiwan,s exposure to fluctuations
in the PRC economy and may further raise the price of each
side,s efforts to apply pressure across the Strait. (End
summary.)


2. (U) Most of Taiwan,s investment in Mainland China has
been aimed at the export market. First labor-intensive
manufacturing of consumer goods like apparel, shoes, and toys
moved production to China followed by high-tech manufacturers
of electronic goods. Both were aimed at producing consumer
goods for export to the U.S., Japan and Europe. This kind of
investment has also driven Taiwan,s trade with the Mainland.
High-tech components sold to Taiwan firms manufacturing
electronic consumer goods in the PRC dominate cross-Strait
trade accounting for more than half of Taiwan,s exports to
the Mainland.


3. (U) Taiwan,s steel industry fits this pattern of trade
flow. Cross-Strait investment in the steel industry has been
small, but Taiwan exports a large proportion of its steel
output to the Mainland. As much as 90 percent is then

exported again after processing into finished consumer goods.
However, a different phenomenon is taking place in the
cement industry. Taiwan cement firms are investing
significant amounts in Mainland China but not to take
advantage of China,s cheap labor to produce goods for the
U.S., European and Japanese markets. Instead, cement
industry investors seek to tap growing domestic demand in the
PRC.

Steel Trade ) Targeting the High-End Market
--------------


4. (SBU) The PRC is a net steel exporter, but most of the
exports are low-quality, upstream steel, allowing Taiwan the
opportunity to continue exporting its high-quality downstream
steel products, such as cold-rolled steel, silicon steel, and
galvanized sheets. Y.S. Chen, Assistant Vice President at
China Steel, Taiwan,s largest steel producer accounting for
about 10 million metric tons of Taiwan,s 17 million MT total
output, told AIT/T that 10 percent of China Steel,s total
production is exported to the PRC. He also estimated that up
to 15 percent of the output that China Steel sells within
Taiwan is further processed on the island and then exported
to the PRC in products such as bolts, nuts, and hand tools.
Wu Sheng-feng, General Secretary of the Taiwan Steel and Iron
Industries Association (TSIIA) told us that approximately 50
percent of Taiwan,s steel exports go to Mainland China. He
estimates that 80 to 90 percent of Taiwan,s steel is then
used to produce PRC exports. According to Yieh Phui Steel,s
President Wu Lin-maw, his firm,s exports to the PRC
accounted for 50 percent of its total output. Twenty-five
percent of output was sold to Hon Hai Precision, Taiwan,s
largest company by revenue, which uses the galvanized steel
to produce its computer cases.

Steel Investment ) Strategic Disadvantages
--------------


5. (SBU) Although Taiwan,s steel exports to the Mainland are
considerable, investment has remained relatively small.
TSIIA,s Wu told us that six of the association,s members

SIPDIS
have invested in the Mainland, mainly focusing on downstream
processes, like cutting and galvanizing. Chen of China
Steel, which has not invested in the PRC, explained that
investing in the PRC would be more attractive if Taiwan firms
could build a vertically integrated mill, allowing them to
produce their own high-grade inputs for downstream products.
However, Chen argued that the PRC wouldn,t approve
investment licenses for upstream steel production. In
addition, cross-Strait shipping costs are low enough (reftel)
to keep Taiwan steel exports competitive in the Mainland
market. Yang Chiu-yueh, managing director of Kao Hsing Chang
(KHC) Iron and Steel, pointed out that the cost of shipping
one ton of steel to the PRC was as low as USD 13, while the
cost of shipping one ton from Taiwan,s steel production
center of Kaohsiung to Taipei was USD 15. In October 2001,
KHC initiated plans to build a steel pipe producing plant
through a joint venture with China Petroleum and Natural Gas
in the PRC. However, KHC has suspended the project primarily
because it has been unable to get enough high-quality steel
inputs.

Cement Investment - Cleaner, More Efficient, Higher Quality
-------------- --------------


6. (U) Taiwan,s cement industry has taken a different
direction with relatively high-levels of investment in the
PRC aimed at supplying domestic PRC demand. Chia-Hsin Cement
was the first Taiwan firm to invest in Mainland China. It
first entered the Mainland cement market in 1993 and began
production at its first plant in 1998. Today there are four
firms with eight cement production plants in the PRC. Most
are located in the Yangtze River Delta area. Hsing Ta Cement
is preparing to become the fifth Taiwan firm to invest in the
Mainland. Nearly 25 percent of cement produced by Taiwan
firms is produced in the PRC.


7. (SBU) Despite administrative control measures designed to
slow growth, the PRC has approved new investment proposals
for Taiwan cement firms. Taiwan firms offer production that
is more environmentally sound. According to Hsing Ta Cement
Chairman John Yang, much of the PRC,s cement is produced
with limestone mined by individuals who use excessive
quantities of dynamite to recklessly blow holes in hillsides
with rich deposits. This technique is inefficient, produces
large amounts of air pollution and makes it difficult to
repair the damaged landscape. In addition, Taiwan firms
produce a higher grade of cement than local PRC producers.
As Yang explained, the PRC has three grades of cement. Most
countries and Taiwan have only one grade, which is roughly
the same as the highest grade in the PRC. Demand for
higher-grade cement has the strongest potential for long-term
growth.

Cement Investment - Different Strategies
--------------


8. (SBU) Different Taiwan cement firms have pursued different
strategies in their Mainland investments but in the end all
have focused on the domestic PRC market. Chia Hsin Cement
Greater China Holding Corp CEO Jason Chang told AIT/T that
its original purpose in investing in the Mainland was to
supply the Taiwan cement market. Chang said that after
Taiwan began restricting mining rights on Taiwan,s west
coast in the early 1990s, Chia Hsin calculated that basing
operations on Taiwan,s east coast would be unprofitable and
looked to coastal locations in the Mainland to supply
Taiwan,s market. Chia Hsin abandoned cement production in
Taiwan entirely. In its first year of production, nearly 80
percent of production from Chia Hsin,s Zhejiang plant was
exported to Taiwan. After the Asian financial crisis pushed
down cement prices in the region by more than 50 percent,
Chia Hsin began selling more to the domestic PRC market. By
2003 all of the plant,s output was consumed in the PRC.
With cement prices in the PRC dropping, Chang says the firm
will export approximately 40 percent of output in 2005.


9. (SBU) Citing transportation costs, Hsing Ta,s Yang
dismisses exporting entirely as a viable option for cement
except to dispose of excess supply. Hsing Ta is looking to
establish a plant in a location where it can take advantage
of strong existing demand or capitalize on future growth.
According to Yang, Hsing Ta is considering sites in Wuhan,
Nanjing, or Yunnan province. Although Hsing Ta expects that
up to 60 percent of its customers would be Taiwan firms,
including Taiwan ready-mix cement producers, only minimal
output would be exported from the PRC.

Cement - Lower Prices and Long-Run Growth
--------------


10. (SBU) Taiwan cement firms and industry observers believe
that the PRC,s macro-economic control measures have had a
substantial impact on the Mainland cement market, but
long-term potential for demand growth justifies further
investment particularly as Taiwan,s cement demand has
fallen. According to Christopher Pei, Secretary General of
the Taiwan Cement Manufacturers, Association, demand in
Taiwan reached its peak in 1993 at 1,332 kg per capita. By
2003, per capita demand had fallen to 657 kg. In comparison,
PRC per capita demand is only 300-400 kg leaving much
potential for growth. Chia Hsin,s Chang told AIT/T that
currently the domestic cement market in China is not only
affected by macro-economic controls, but is also in a
cyclical downturn as the PRC nears the end of the Tenth
Five-Year Plan. He expects a strong rebound beginning in
2006 after cement industry consolidation in 2004 and 2005.

Comment ) Increasing Economic Integration?
--------------


11. (C) Cement and steel industry cross-Strait trade and
investment show that Taiwan has been able to take advantage
of its superior technical expertise to find market
opportunities in the PRC, not only in the "high-tech"
industries of information technology and electronics, but
also in traditional heavy industries. Growth in cement
industry cross-Strait investment also shows another trend )-
a growing dependence on domestic demand in the PRC. Most
Taiwan-owned firms in the Mainland manufacture goods for
export to a third market, and the bulk of Taiwan's exports to
the PRC provide inputs for those investments. This pattern
has insulated Taiwan from fluctuations in the PRC economy.
However, in the cement industry this pattern is not holding.
Taiwan's cement producers rely increasingly on domestic PRC
demand for continued profitability and growth. Other
industries will eventually follow this trend. The PRC
recently surpassed Japan as the number two market for
computers in the world. Its domestic market will figure more
and more heavily into the strategies of Taiwan's electronics
and information technology firms, as well as other
industries. This phenomenon will increase political pressure
in favor of further cross-Strait economic liberalization from
Taiwan firms that see the domestic PRC market as their best
opportunity for future growth. With the increasing danger of
harming domestic economic interests, Taiwan will find its
options for applying economic pressure on the PRC will
diminish. However, economic integration runs both ways.
With the PRC's growth dramatically outstripping Taiwan's and
investment and trade pouring in from other countries, more
profound economic ties with Taiwan will help restrain the
PRC's hand in dealing with the Taiwan question. (End
comment.)
PAAL