Bigger steel merger may face obstacles

A worker passes a steel processing area in a factory in Dalian, North China's Liaoning province, May 31, 2016. [Photo/IC]

Consolidation aims to cut industry's excess supply and increase overall productivity

Consolidation of China's steel industry may be more complicated than many outside observers thought, according to some central government sources.

Commenting on market rumors that China is regrouping its steel industry into two large blocs, one in south and the other in north, an official from the National Development and Reform Commission told China Daily that forming the northern steel group will probably take a much longer time than the southern group.

The formation of the southern steel group may come about soon, industry observers say.

A notice of suspension of stock trading was issued by both Baoshan Iron & Steel and Wuhan Iron & Steel on 26th June, two large State-owned steelmakers rumored to form the backbone of the possible southern steel group.

Li Hongzhong, Party secretary of Hubei province, met with chairmen of Baoshan Iron & Steel and Wuhan Iron & Steel this week to push restructuring of the two companies.

But, no final confirmation has been given by the two companies, except for three articles published by the Xinhua News Agency indicating that the Ma'anshan-based Magang Group would be a third member of the proposed southern group.

In contrast with the southern steel-makers, domestic industry sources say, it is still hard to guess how the would-be northern group's top management might be formed.

Bloomberg reported that a northern group will be formed by Shougang Group, formerly based in Beijing and relocated out of the city before the 2008 Olympics, and Hebei Iron and Steel Group, whose interests cover all of Hebei province.

Though both companies are located near each other, Shougang is directly under the central government administration, while its possible partner is under the Hebei provincial government.

The two companies have markedly different cultures, said Wang Guoqing, director of Lange Steel Information Center, a Beijing-based industrial consultancy. But, if they really can be merged, the northern group would still be larger than the southern group by 16 million tons of annual capacity, Wang said.

Strategically, analysts say, such reorganization will help the industry shed its excess capacity, cut pollution, and be more focused on product quality.

Zhu Bin, an analyst with the Southwest Securities, said he believes the industry's consolidation will increase its general profitability, enabling it to optimize its product structure and cut costs.

According to the World Steel Association, the crude steel production of Hebei Iron and Steel Group, Baosteel Group, Shougang and Wuhan Iron and Steel Group in 2015 reached 47.74 million, 34.93 million, 28.55 million and 25.77 million tons, respectively. The four groups are respectively the second, fifth, ninth and 11th largest iron and steel groups in the world.

If the consolidation program succeeds, China's northern and southern steel groups would be the second and third largest iron and steel companies in the world, following only Arcelor Mittal, the Luxembourg-based Indian multinational, whose crude steel production topped 97.13 million tons last year.

Du Juan contributed to the story.