Major steel merger could face obstacles

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 sources with the central government.

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

A technical worker examines steel plates at Hebei Iron and Steel. Zheng Yong / For China Daily

The formation in the south may come about soon, industry observers say.

Baoshan Iron and Steel and Wuhan Iron and Steel both issued notices of suspension of stock trading on June 26. The companies are large, state-owned steelmakers that could form the backbone of the southern steel group.

Li Hongzhong, Party secretary of Hubei province, met with chairmen of the Baoshan and Wuhan steel works recently to push for restructuring of the companies. However, no final confirmation has been given by the companies. Xinhua News Agency, however, indicated that Magang Group could be a third member of the proposed southern group.

In contrast with the southern steelmakers, industry sources say it is hard to guess how the northern group's top management might be formed.

Bloomberg reported that a northern group will be formed by Shougang Group, which was moved out of Beijing ahead of the 2008 Olympics, and Hebei Iron and Steel, whose interests cover all of Hebei province.

Although both companies are located near each other, Shougang is directly administered by the central government, while its potential partner is under the Hebei government.

The companies have markedly different cultures, according to Wang Guoqing, the director of Lange Steel Information Center, an industrial consultancy in Beijing. Yet if they can be merged, the northern group would still be larger than the southern group by 16 million metric tons of annual capacity, he adds.

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

Zhu Bin, an analyst with Southwest Securities, says he believes the consolidation would increase general profitability, enabling the industry to optimize its product structure and cut costs.

According to the World Steel Association data, Hebei Iron and Steel produced 47.74 million tons of crude steel last year, making it the world's second-largest steel company. For Baoshan, the figure was 34.93 million tons; Shougang, 28.55 million tons; and Wuhan, 25.77 million tons.

If the consolidation program works, the northern and southern groups would be the second- and third-largest iron and steel producers in the world, after only Arcelor Mittal, the Indian multinational based in Luxembourg that produced 97.13 million tons last year.

Du Juan contributed to this story.

Contact the writers at wangyanfei@chinadaily.com.cn

(China Daily European Weekly 08/19/2016 page30)