Two Chinese steel groups have taken the first step in a long-awaited takeover to create the world’s second-largest steelmaker — a move that Beijing hopes will spark a wave of consolidation and improve efficiency in the bloated industry.
However, analysts said that the deal between Baoshan Iron and Steel and Wuhan Iron and Steel is only part of what is likely to be a long and complex process to consolidate China’s fragmented steel industry.
On Tuesday Baoshan, the listed arm of China’s second-largest steel producer Baosteel Group, said it would issue new shares in order to absorb the listed arm of Wuhan Iron and Steel Group, China’s fifth-largest steel producer by volume.
The subsuming of Wisco’s traded entity by Baosteel’s listed unit is a preliminary step in the merging of the two parent groups, and is subject to Chinese regulatory approval, according to a filings by both companies.
The merger does not mean success of this “test case”, according to Xu Zhongbo, analyst at Beijing Metals Consulting. “The most important thing is that steel production comes together quickly,” he said.
“In the two groups there many small companies and it will take a long time to decide which businesses will be sold or closed — this could be a costly process,” he said.
The creation of Baowu Steel Group — as China’s press has dubbed the merged entity — is considered the starting point for Beijing’s plans to improve Chinese efficiency by pushing zombie companies out of operation.
China’s steel’s overcapacity helped plunge the global industry into crisis last year, when surging cheap Chinese exports dragged down global prices.
The looming plan to merge the entirety of Wisco and Baosteel Groups into a single entity — with assets of Rmb700bn ($104.9bn) and 60m tonnes of annual capacity — has already been approved by the State-owned Assets Supervision and Administration Commission, according to respected financial magazine Caixin.
The finalisation of the deal is a poster child for a recently released plan from the State Council, China’s cabinet, to whittle Chinese steel companies down to a handful of groups responsible for the majority of production by 2025. Small private companies currently account for half the country’s output.
However, such plans have previously been touted — in 2005, Beijing said it hoped its top 10 steel producers would account for 70 per cent of production by 2020.
A flurry of hook-ups from the past government push failed to materialise as companies each fought to individually reap the benefits of a stimulus-aided construction boom and steel demand spike in the late 2000s.
Beijing is hoping that tough market conditions will allow them to push through mergers with greater speed.
On Tuesday, two smaller state-owned steel companies, Angang Steel and Bengang Steel Plates, halted trading and the Chinese press reported that a potential merge of the two listed companies was on the cards. A merger between the two companies’ parent groups was originally announced in 2005.