China Dream Finally Becoming Reality for Biggest Steelmaker

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  • Baosteel, Wuhan Steel tie-up may herald start of consolidation
  • ArcelorMittal has long called for efforts to curb China supply

The Chinese steel industry has long been a needle in the side of the world’s top maker of the metal. Perhaps that’s about to change.

China’s second- and sixth-largest steelmakers by output announced that they’ve entered restructuring talks, with analysts speculating it could lead to a merger creating the countries’ biggest mill. The discussions highlight China’s efforts to overhaul its inefficient state-run sector and bolster an economy headed for its slowest growth in decades.

It’s a move that’s likely to be welcomed by ArcelorMittal, the biggest maker of steel, as it has long called for consolidation in the country that produces half the world’s metal. While European and Japanese companies have been forging alliances to restrain supply, China’s fragmented industry has a record of producing more steel than it needs and exporting the surplus at prices other makers can’t match.

The merger of state-run Shanghai Baosteel Group Corp. and Wuhan Iron & Steel Group Corp. would create a company with the capacity to make more than 70 million metric tons of steel. That would make it second to ArcelorMittal, with 114 million tons.

Massive Scale

“It’s not only a government-initiated move but also China’s first steel merger of this massive scale,” Hu Yanping, an analyst at researcher, said by phone from Beijing on Tuesday. “It shows the government’s resolve on supply-side reform with more such deals to follow.”

It may also lead to plant closures as the nation seeks to clear its surplus. Exports are running at record levels, after hitting more than 100 million tons last year, creating a global glut and drawing fire from rivals in Japan, Europe and the U.S.

“This is an indication of China effectively working on the structure of its industry, which is suffering from fragmentation,” European steel-lobby group Eurofer said by e-mail Tuesday. “The major issue here is that this fragmentation underpins overcapacity in China.”

ArcelorMittal has long argued for more deals among Chinese companies, with billionaire Chief Executive Officer Lakshmi Mittal saying this year the country’s industry was lagging behind other regions. Since Mittal Steel Co. bought Arcelor SA in 2006, in the steel industry’s biggest takeover, the company has shuttered plants to remove excess capacity in its core markets.

“We need further consolidation as well as capacity rationalization” in China, Aditya Mittal, chief financial officer of ArcelorMittal, told investors in May.

That chimes with Chinese government statements. The chairman of the country’s top economic planner, the National Development and Reform Commission, said on Monday that the nation would cut steel capacity by 45 million tons this year. It had already pledged to reduce capacity by as much as 150 million tons through 2020.

“It would be a very important step in the process and create a clear market leader” in China, said Ingo Schachel, a Commerzbank AG analyst. “Whether it is a start and there is more to come, that’s hard to tell.”

Still, not everyone is convinced of much respite for steelmakers elsewhere.

“Consolidation doesn’t automatically mean capacity shutdowns,” said Kirill Chuyko, head of equity research at BCS Global Markets. “I wouldn’t expect this to be a turning point. After all the Chinese won’t shoot themselves in the foot by reducing steel production more than necessary.”