Baosteel leads way on reform

PUBLISHED : Friday, 02 June, 2006, 12:00am
UPDATED : Friday, 02 June, 2006, 12:00am

In keeping with moves to promote transparency, top steelmaker buys shares in rival on the open market

China's biggest steelmaker has acquired 5 per cent of the sixth-biggest in the first large purchase on the open market since the country began its shareholding reforms a year ago.

Baosteel Group paid as much as 482 million yuan for the stake in Hebei-based Handan Steel, calculated on the share price at the time of its acquisitions, which were made over several months. On Wednesday, Baosteel and its two subsidiaries held a total of 138 million shares in Handan.

'The whole purpose of the non-tradable reform is to encourage more merger and acquisition activity and encourage more consolidation in industries like steel,' said Peter So, head of China research at Macquarie Securities.

The 260 steelmakers in China's fragmented industry are being targeted for consolidation as Beijing attempts to create world-beating firms and reduce overcapacity.

The plan is to eventually have two major companies each producing at least 30 million tonnes a year, complemented by a string of companies producing 10 million tonnes and a few producing five million tonnes annually.

Baosteel plans to raise its production capacity from the current 30 million tonnes a year to about 50 million tonnes, through expansion that includes a planned facility in Guangdong that would be able to produce up to 20 million tonnes.

'Baosteel is starting to firm up its southern strategy, its central-eastern strategy has been consolidated through its co-operation with [Anhui-based] Magang Group and so purchasing Handan would give Baosteel its northern base,' said Melinda Moore, chief representative of Steel Business Briefing in China.

'Baosteel wants to be one of the two largest but there are now at least three newly merged firms nipping at their heels in terms of tonnage produced and it's been a bit of a laggard in the last couple of years as it got its own internal structure sorted out.'

In the past, such deals between large listed companies were done at steep discounts to the listed share price as state-owned entities traded in illiquid state-owned and legal person shares.

The opaque nature of such transactions and the loss of state control are key reasons for the share reform, which aims to make all state-owned and legal person shares tradable on the Shanghai and Shenzhen exchanges.

'A more transparent deal like this is a sign of maturity in the steel market,' Ms Moore said. 'Until now, deals have often been government-directed mergers of state entities.'

Companies that have undergone the state share reform process are not allowed to sell non-tradable shares for one year, after which they can sell up to 5 per cent of the company's total issued capital in the public market and a further 5 per cent in the third year.

'We are going to see a lot more of these deals in the coming months as the lock-up periods expire and companies begin to offload some of the state's holdings,' Mr So said.

After three years from the start of a company's reform process all its shares will become freely tradable, although the state is likely to retain control of companies in industries regarded as having strategic importance.