Following the Cement Trail: Citi Take on China Steel Reform

Updated on
  • China’s top 10 mills market share has fallen to 34%: Citi
  • In down-cycle, government sees need for consolidation

China’s plans to unite its biggest steel mills could reverse years of industry fragmentation, tracking consolidation in other sectors including cement and coal as the government targets a 60 percent market share for the top players, according to Citigroup Inc.

China’s 10 biggest steel producers had a market share of about 50 percent in 2010, which declined to 34 percent last year as smaller mills ramped up output, according to Citigroup data. In the same period, the cement industry has been restructured to lift that same measure from 39 percent to 53 percent last year. And in coal, the share rose from 30 percent to 42 percent.

“The government realizes that steel is the only sector when compared with coal or cement where the concentration ratio is actually declining in the past four to five years,” Jack Shang, an analyst at Citigroup in Hong Kong, said in a phone interview. “Three or five or more years ago, we were still on an up-cycle. What’s different now is that the government realizes we are in a down-cycle, that steel demand has peaked and they really need to consolidate.”

The nation that makes more than half the world’s steel is creating one of the biggest steel companies with plans announced this week to merge both the listed units and group companies of China’s the second-biggest producer, Baosteel Group Corp., and Wuhan Iron & Steel Group Corp. More tie-ups could follow as the government tries to bring the steel sector back in line with concentration levels in other basic industries, said Shang, who previously worked as investor relations manager at Baosteel’s listed firm.

The value of cement mergers in China last year doubled to about $2 billion, according to Bloomberg Intelligence. The consolidation push is being taken further this year, led by government approval of a merger between state-owned producers China National Building Materials Group Corp. and Sinoma Group to create the world’s biggest cement maker.

The top 10 cement and steel producers should control 60 percent of output by 2025, according to targets set by China’s government. Previous goals for consolidating the upper echelons of the steel industry were frustrated by rapid growth of smaller firms, and by mergers that were announced, but “happened on paper only,” Shang said.

— With assistance by Martin Ritchie

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