Big China steelmakers eye merger

A man reads a newspaper beside an advertising billboard for Baosteel, China's largest steel maker, on April 4, 2008 in Beijing. China's top steelmakers' association has warned that Australian mining companies could face "revenge" over the aggressive pursuit of higher prices for iron ore, a report in the Australian Financial Review said, quoting the deputy director-general of the powerful China Iron and Steel Association, Chen Xianwen. AFP PHOTO / Frederic J. BROWN / AFP PHOTO / FREDERIC J. BROWN©AFP

Two of China’s biggest steelmakers are in joint restructuring talks and are likely to merge, as Beijing explores ways to staunch losses in an industry blighted by overcapacity and sluggish demand.

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Baosteel Group and Wuhan Iron & Steel Group, China’s second- and fourth-largest steel companies respectively, said they would undergo a joint “strategic restructuring”, according to two identical but separate public announcements released on Sunday by the companies’ listed entities.

The merger, if approved, would leapfrog the group over Hebei Iron and Steel to create China’s biggest steelmaker, with an annual capacity of more than 60m tonnes. The group would rival ArcelorMittal, the world’s largest steelmaker, which produced 97m tonnes in 2015.

The two Chinese steelmakers, whose listed arms have a combined market capitalisation of $ 16.3bn, both struggled financially in 2015 — profits at Baosteel dropped more than 80 per cent year on year to Rmb714m, while Wuhan Iron & Steel reported a Rmb7.5bn loss.

Chinese steelmakers, which are responsible for about half of the world’s production, exported 112m tonnes of steel last year as the country’s slowdown hit domestic demand, pushing some steelmakers into the red.

The global industry is struggling to adjust to declining Chinese demand, and steelmakers worldwide are paring back their operations — a drive that plunged British steel into crisis in March when Indian owner Tata Steel put its UK operations up for sale.

Beijing hopes to make use of market pressures to push through long-held restructuring goals and staunch losses in the overcrowded industry.

A merger between Baosteel, China’s largest centrally owned steelmaker, and Wugang, would help Beijing hit its capacity reduction targets, according to Xu Zhongbo of Beijing Metal Consulting.

“If Wisco [Wugang] and Baosteel come together, it’s easier to cut capacity by closing a single large but outdated blast furnace,” he said.

The state planner recently announced plans to cut the country’s 1.2bn-tonne annual steel capacity by 45m tonnes this year, while the state legislature in February outlined a plan to cut production by 100m-150m tonnes over five years.

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Merging the country’s state-owned steel groups has proved difficult for the Chinese government, and many tie-ups involved groups only nominally linking up and continuing to operate largely independently.

But Mr Xu noted that recent changes in Baosteel management and an investigation into former Wugang chairman Deng Qilin announced last August make the companies more pliable in the face of the central government’s consolidation drive.

The potential merger may also allow the two companies to move up the value chain and increase domestic market share in areas where China still imports steel products, according to Sebastian Lewis, a Shanghai-based analyst at Platts.

“The move is in line with goals to increase production of certain high-end products,” he said, adding that “auto sheet [used to produce vehicle bodies] and electrical sheet [used in electrical motors] are small but specialist markets where the companies could stand to gain market share”.

Futures for rebar, a type of steel used in construction, rallied on Monday on the Shanghai Futures Exchange, with the most traded contract gaining 5 per cent through the morning to trade at more than Rmb2,260 ($ 340) per tonne in the early afternoon — a price last reached in early May.

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