State-run Baogang asked to steer Shanghai steel mills to profitability

Baoshan Iron & Steel Group (Baogang) - China's most profitable steel venture - has been asked to merge with a group running Shanghai's steel mills in a proposal which may provide a model for rationalising centrally-run and locally-run state enterprises.

A Shanghai Economic Commission official said the municipal government had approved a proposal for Baogang to merge with less efficient mills under the Shanghai Metallurgy Shareholding Group - subject to ratification by Beijing.

The deputy director of the commission's enterprise management department, Hu Xiongfei, said: 'As part of the modern enterprise reforms, the municipal government has taken the initiative to get Baogang and Shanghai Metallurgy to look into a possible merger.' Baogang, a state enterprise under central government control, operates a vast steel complex 26 kilometres from Shanghai city centre. Shanghai Metallurgy runs three steel mills under the municipal government.

With pre-tax profit of 3.13 billion yuan (about HK$2.9 billion) from steel output of about 7.7 million tonnes last year, Baogang was the biggest money maker in the industry. It has 10,500 employees.

Bogged down by a staff of 110,000 and low productivity, Shanghai Metallurgy's mills made only a small profit after being in the red the previous year.

Mr Hu said the proposed merger, if approved, would have serious policy implications for state sector reforms.

'The central government is understandably cautious [about the proposal] as it could serve as a model nationwide for centrally-controlled state enterprises and locally-controlled ones to join hands,' he said.