Baoshan Iron & Steel and its parent Baosteel Group have agreed to invest a total of 10 billion yuan (HK$12.3 billion) to take a minority stake in PetroChina's third west-to-east natural gas pipeline construction.
Shanghai-listed Baoshan, one of the mainland's largest steel smelters, said its board has agreed to take a 12.8 per cent stake in the project, which requires it to invest eight billion yuan of equity capital. The move is aimed at expanding steel pipe sales.
Baosteel Group will take a 3.2 per cent stake and invest two billion yuan of capital.
The project entails a 5,220 kilometre pipeline stretching from Xinjiang Uygur autonomous region in the northwest to northern Guangdong province, as well as eight branch and sub-branch lines. The projects' estimated cost of 116 billion yuan will be funded by 62.5 billion yuan of shareholders' capital.
"Baoshan's participation in the project will help strengthen our strategic co-operation with [PetroChina], and establish a stable supply chain relationship," Baoshan said in a statement.
Baoshan sold 730,000 tonnes of steel pipes in the first half, or 6.2 per cent of its total sales volume.
The segment earned a gross profit margin of 11.1 per cent, the highest among the company's seven segments. The firm's overall margin is 6.4 per cent.
Steel pipes, used in many areas including gas pipelines, were also the only segment that saw higher margins in the half.
UOB Kay Hian Securities senior analyst Helen Lau said Baoshan's participation can help secure orders for its steel pipes although it is not clear whether the orders are subject to tendering. In addition, Baoshan can also share the pipeline's future profit.
According to Baoshan, the board has approved the investment despite a cut in the pro- ject's estimated return on investment to 8 per cent from 10 per cent.
Despite its relatively small volumes, gas pipeline is a high growth segment for the steel sector, as Beijing plans to raise the length of the nation's major gas pipelines by 110 per cent by 2015 from 40,000 kilometres in 2010.
Oversupply and weak demand have caused many mainland steel makers to suffer. For instance, Baoshan's operating profit slid 48.8 per cent to 4.14 billion yuan in the first half of the year from a year earlier.
PetroChina's first west-to-east pipeline linking Xinjiang and Shanghai was completed in 2004, and the second one connecting Xinjiang and Hong Kong has recently been finished. Both were wholly owned by PetroChina. It took only a 52 per cent stake in the third pipeline.