Two top China steelmakers announce merger to combat glut

Two top China steelmakers announce merger to combat glut

After the takeover, Wuhan Steel will delist from the A-share market on the Shanghai Stock Exchange.

The Baosteel-WISCO merger will create a steel giant with annual capacity of more than 60 million tons and over 700 billion yuan ($104 billion) in total assets, which would replace Hebei Iron and Steel Group to become China’s largest steelmaker and the world’s second-largest mill, behind Luxembourg-based ArcelorMittal.

A worker takes samples of molten iron for quality testing from a furnace at the Wuhan Iron and Steel (Group) Corp. China Business News reported yesterday that the state asset watchdog had given its nod and submitted the merger plan to the State Council for final approval.

An Angang-Benxi tie-up would add to a flurry of potential steel mergers said to be under way as China’s government seeks to reshape the struggling, state-dominated industry.

But steel industry analysts said the better-than-expected results of China’s private-sector steel suppliers may pose an obstacle to the restructuring and capacity cut efforts under way by the Chinese government.

The resulting overproduction has seen steelmakers around the world suffer huge losses. According to Chi Jingdong, Deputy Director of the China Iron and Steel Association, the government wants to consolidate 60-70 percent of the nation’s steel mills into 10 mega mills.

Baosteel’s net profit tumbled 83% to 1bn yuan ($150m) past year, while Wuhan lost 7.5bn yuan, a sharp drop from its 1.3bn yuan net profit in 2014.

“Restructuring in China’s steel industry is the trend and it’s an unstoppable one”, said Chen Bingkun, an analyst at Minmetals and Jingyi Futures (五礦經易期貨).

Chinese steel demand has slumped as economic growth slows and the global steel industry is assailed by overcapacity.

Ansteel is the world’s seventh biggest mill and Benxi Steel ranks 21st. The listed arms of the two groups suspended trading in Shenzhen yesterday pending statements on the report.

The Hong Kong shares climbed as much as 5.4 percent to HK$4.12, the biggest intraday gain since July 13, before trading at HK$4.05 by 11:16 a.m. Shanghai time.

Analysts said the mergers would help China deal with overcapacity that has long plagued manufacturers.

“China is now trying to cut down its steel production through policy”. China has vowed to reduce its 1.2 billion tonnes of capacity by 100-150 million tonnes by 2020.

The mergers will create a monopoly in the China steel market which theoretically should allow the steel giants to control production. “With no actual restructuring and optimization of the business, such deals can not really affect the industry”, Wang noted. It’s not the size of the company that counts. “You can’t change the global steel market by just adding them up”.