Jul 01, 2011 09:36 PM

Disassembling a Steel Giant

The Lianshui River running through the city of Loudi in Hunan Province forms a natural trench between Valin Lianyuan Iron & Steel Group (Valin Steel) and the rest of the city, turning the more than 50-year-old steel plant into a citadel unto itself. People at Valin Steel have come to refer to it as the "10-mile steel city."

Was it ever a city full of promise? Toward the end of 1997, Hunan's three major state-controlled iron and steel enterprises – Xiangtan Steel, Valin Steel and Hengyang Steel – were restructured into Hunan Valin Iron & Steel Group. But from the beginning, Valin Group found it difficult to manage the daily operations of Valin Steel.

Established in 1958, Valin Steel now produces more than 8 million tons of steel annually, with total assets worth 37.8 billion yuan. The company also boasts 15,900 employees and booked 31.6 billion yuan in revenue last year. But in 2010, its losses stood at a hefty 2 billion yuan.

Finally in August 2010, Valin Group's then-general manager Cao Huiquan was sent to Valin Steel to head the loss-making unit. The move from the parent company to a subsidiary would have been considered a "demotion" but this was in fact a deliberate arrangement by the local state asset regulator and Valin Group, in the hopes that Cao's new management would help address Valin Steel's predicament.

Just as soon as the newcomer Cao was sworn in, a curtain was pulled on corruption.

Bits of Insider Information

Cao said in a company report that "Valin Steel's losses are mainly attributable to internal difficulties and management." A person close to the matter further said that insider transactions within Valin Steel were practically "beyond cure."

In an attempt to root out the corruption, Cao undertook several measures, including a probe into Valin Steel's management, encouraging workers to report corrupt executives and even inviting government agencies and police to conduct investigations into the company.

This led to firings, and in some cases, arrests. A total of six senior management members and seven middle-management personnel were removed from Valin Steel for their involvement in insider transactions. More than 100 junior management staffers were also found to have been involved in inside transactions.

An official from the Loudi City government's anticorruption department lamented: "Out of nine senior executives, problems were found with six, with the remaining three clean ones all recently sent from and appointed by Valin Group."

Keeping it in the Family

Much of the shady deals involved favors for family members. Valin Steel Deputy General Manager Liu Jishen's brother-in-law Liu Chun supplied sulfuric acid to Valin Steel through Loudi City Dechun Industry and Trade Co. Another relative of Liu Jishen – his brother-in-law Duan Yongzhong – was also found to have done business with Valin Steel.

Other examples included two private firms that were owned by Li Yi, brother-in-law of Valin Steel Deputy General Manager Jiao Guohua, which sold hot-rolled coils, coal tar and other products to Valin Steel.

Valin Steel Deputy General Manager Wu Xinping's younger sister, cousins and brother-in-law all supplied various part materials and raw coal to Valin Steel. These relatives either owned related companies that did business with Valin Steel or held major positions in these companies.

Then there was the case of the Loudi Daxin Trading Co. This company's legal representative was the younger brother of Wang Jianwen, former party chief of Valin Steel's fuel division. The connection with Wang allowed Daxin to win steel processing and transport contracts from Valin Steel. Wang himself also has equity holdings in Daxin.

Additionally, Deng Yuanying, who owns a coal washing plant, secured the coal washing business from Valin Steel, with the help of her brother-in-law Chen Pingzhang, who was once the deputy party secretary of this state steel mill.

Trimming and Skimming

From the top to junior management, a large number of Valin Steel executives tried to profit from the company and hollow out state assets. In many of these transactions, procurement reports were faked to overstate the quantity and prices of goods purchased from suppliers.

In early 2010, Valin Steel planned to buy electric air control valves. The procurement staff submitted a report stating 110 such valves were required and a company in Loudi with close ties to management eventually won the contract, with the procurement price averaging 7,800 yuan for each valve.

However, a later investigation revealed that the actual number of valves needed was only 10, and that they should only have cost 1,500 yuan apiece. The entire procurement process involved nearly 10 company divisions, with the head of each unit exchanging state assets for personal kickbacks.

"Steal the steel maker and you (Valin Steel employees) can be better off," became a popular phrase in Loudi city.

A source close to the Valin Steel's corruption investigation team told Caixin that in Valin Steel, an entire truckload of steel worth millions of yuan could easily pass five checkpoints and head right out of the plant, a brazen example of collusion throughout the company's different units.

"When a company buys materials at higher-than-market prices and sells products at below-market prices, how can it make a profit and not lose money?" a longtime Valin Steel worker lamented in an internal company publication.

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