Photographer: ChinaFotoPress via Getty Images

China's Metals-Building Merger Echoes Old School Conglomerates

  • Minmetals, China Metallurgical to have global supply chain
  • Merger compares with European groups formed in 1970s, `80s

China’s state-backed merger of its top metals trader and a major engineering company will create a global group with a supply chain that stretches from a copper mine in Peru to electric wiring for a sports stadium in Beijing.

China is widening the overhaul of its bloated state sector, announcing last week that China Minmetals Corp. had agreed to buy China Metallurgical Group, combining two state enterprises with about $87 billion in revenues last year. The merger will create a conglomerate similar to ThyssenKrupp AG and other groups that emerged in past decades in rival manufacturing powerhouses, said Uwe Parpart, chief strategist at brokerage Reorient Group Ltd. in Hong Kong.

“In Germany in the 1970s and 1980s, you had these kinds of outfits that were making steel, they had engineering and logistics, they were integrated companies with an entire industrial chain,” Parpart said by phone. “When you look at the efficiencies that you gain if you have a company that designs a piece of infrastructure which at the same time creates demand for its steel, or its cement or its metals production, that’s very worthwhile. I think that’s the logic.”

GE, Mitsubishi

In the past 50 years, different permutations of conglomerates from General Electric Co. to Mitsubishi Corp. and Hanson Plc have sought to benefit from the reduced risk, increased access to finance and diversification provided by the business model, which has fallen in and out of favor over the decades.

The deal comes after China’s President Xi Jinping vowed last month to speed up reform of state-owned enterprises, which control $17 trillion in assets and employ millions of people. The government later last week announced plans to reorganize two major shipping groups with combined revenue of more than $40 billion, paving the way for the creation of one of the world’s largest container lines.

Against the backdrop of a price collapse that’s battering the global commodities industry, Minmetals, China’s biggest metals trader, is joining forces with China Metallurgical, traditionally a steel plant builder, to form an integrated group connecting mining and the commodities markets with the development and construction industry.

Shanty Towns

The combined company will have the “indispensable advantage” of integrating the whole industrial chain in the metals industry, China Metallurgical said in a statement. MCC gets just one percent of its revenue from its resources division and about 85 percent from engineering and construction. Its business includes redeveloping shanty towns and designing everything from highways to water treatment centers and sports stadiums.

On the other hand, Minmetals has been buying raw materials and selling products for China since around the time that Mao Zedong proclaimed the People’s Republic and now controls mines and deposits from South America to Africa and Australia. It controls a long raw materials chain via its 74 percent stake in MMG Ltd., a Hong-Kong listed miner that has expanded through overseas acquisitions.

‘Little Duplication’

There’ s “little duplication” between the businesses of the two companies, Eva Yip, an analyst at Everbright Securities Co. in Hong Kong said in a research note. Profitability may face geopolitical and commodity price risks, she said.

The two entities have high level of synergy, Minmetals said in a faxed statement. Both businesses belong in the category of metals and minerals and the merger will “improve the overall competitiveness of the company and its level of customer service.” Alex Wei, a spokesman for China Metallurgical in Beijing, declined to comment.

China’s government wants to reshape the state sector, which dominates industries from aluminum to banking, to give a bigger role to market forces as their profitability ebbs following a decades-long investment boom. This comes as the economy expands at the slowest rate in a quarter century, weakening global markets for raw materials and sending prices to multi-year lows.

“Both groups operate resources development businesses and both are struggling amid a tough commodities market,” said Everbright’s Yip. “Integration could improve operating efficiency and reduce competition.”

— With assistance by Martin Ritchie

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