First came Wuhan Iron and Steel's pig farming, and now it's reported that Fangda Special Steel is "selling water". At a time when the steel industry is in a slump, steel enterprises are all taking unconventional paths and seeking diversified development paths.

On the evening of November 8th, Fangda Special Steel announced that the company plans to invest 100 million yuan to establish a wholly-owned subsidiary in Zhenning, Guizhou Province. The company's main product is mineral water. This is the second time that Fangda Special Steel has ventured into non-steel industries after setting up a catering enterprise in the Shanghai Free Trade Zone.

"The development space for the steel industry is limited. Try a new development direction." " Zhong Chongwu, the chairman of Fangda Special Steel, told the "Everyday Economic News" that the scale of the new industries is not particularly large and will not affect the normal operation of the company's main business.

Encountering a bottleneck in development space

Zhong Chongwu, the chairman of Fangda Special Steel, told the reporter from the "Everyday Economic News" yesterday (November 10th) that the reason for making the above investment decision is that Guizhou has good water resources and a favorable investment environment.

As for the deeper reasons, Zhong Chongwu said that the main reason is that the current steel industry has limited room for development and is in a sluggish period.

Fangda Special Steel's previous external investments were related to the company's main business. In 2011, the company had intended to acquire a 74% stake in BOBOKO Investment (Private) Limited to obtain a mine in South Africa. However, the acquisition was terminated due to the lack of approval from the relevant government departments in South Africa.

Subsequently, in order to seek diversified development, in 2012, Fangda Special Steel also invested 100 million yuan in CITIC Mezzanine (Shanghai) Investment Center (Limited Partnership) to actively expand investment and financing channels. At the end of September this year, Fangda Special Steel plans to jointly invest with Shanghai Fuerfu Investment Management Co., Ltd. to establish a holding subsidiary, Shanghai Shuibo Xianglong Catering Co., LTD. While seeking diversified development, the company hopes to take advantage of the geographical location of the free trade zone that Shanghai is building to enhance its reputation.

It should be noted that, unlike most steel enterprises that have made cross-industry investments due to the sluggishness of their main business, Fangda Special Steel's business performance in recent years has not been bad. The company's third-quarter report shows that it achieved revenue of 9.6 billion yuan in the first three quarters of 2013, a year-on-year decline of 3%. The net profit attributable to the parent company was 480 million yuan, representing a year-on-year increase of 52%.

Expert: Be cautious of blind diversification

According to statistics from the China Iron and Steel Association, as of the end of June 2013, the total liabilities of 86 large and medium-sized steel enterprises across the country amounted to 3.02 trillion yuan, while their total profits were only 2.2 billion yuan. Therefore, developing non-steel industries has become a consensus in the steel industry.

In the context of a sluggish industry, many steel enterprises have transformed and diversified to vigorously develop non-steel industries. Among them, non-cyclical and fast-yielding large consumer industries are particularly favored by steel enterprises. For instance, previously Wuhan Iron and Steel's pig farming, Tianjin Rongcheng's investment in liquor, and now Fangda Special Steel's investment in catering and mineral water.

An investment professional from a listed energy company in Zhejiang Province told reporters, "Steel enterprises can no longer achieve long-term development by expanding production. It is indeed an inevitable choice to strive to develop non-steel industries at present. However, the launch of too many non-steel projects often hides investment risks, and blind diversification needs to be guarded against."

According to him, at present, non-steel industries can be divided into two categories. One category consists of industries related to the main steel business, such as mining, machinery, auto parts and mechanical and electrical industries that Shougang has been promoting in recent years. Baosteel's layout in the resource development industry, steel extended processing industry, technical services and coal chemical industry. Another category involves venturing into "side businesses" that have nothing to do with the main business. These businesses often have strong market demand and high profit levels at that time. For instance, steel enterprises' investments in the liquor and real estate industries are precisely due to their decent gross profit margins.

Diversified investment by steel enterprises still seems to be booming at present. This year, Kunming Iron and Steel has jointly established an airline to enter the aviation industry. Hebei Iron and Steel and China Merchants Group plan to jointly enter the logistics, port and shipbuilding industries. Baosteel has entered the e-commerce financial services field through its finance company, etc.

The steel industry is confronted with multiple pressures such as overcapacity, cut-throat competition and environmental protection. Steel enterprises are all seeking to get involved in the development of non-steel industries. A steel analyst from Guosheng Securities believes that in the future, it is not surprising that more steel enterprises will be heard to enter more fields.