Mergers & Acquisitions

Baoshan, Wuhan to merge to create world’s second-largest steel producer

The merger kick-starts President Xi Jinping’s so-called supply-side reform programme to consolidate excess capacity in steel

PUBLISHED : Thursday, 22 September, 2016, 5:46pm
UPDATED : Thursday, 22 September, 2016, 10:57pm

China’s State Council has given the green light to merge two of the country’s largest steel mills to create what could become the world’s second-largest producer, kick-starting president Xi Jinping’s programme to consolidate excess production capacity into fewer, larger groups.

Baoshan Iron & Steel Co., the listed unit of China’s second-biggest steel producer, will swap shares with Wuhan Iron & Steel Co., the number six steelmaker, according to Wuhan’s press statement.

The combined steel company will be called China Bao-Wu Steel Group, according to the statement.

Details of the restructuring are still being discussed.

The merger will create a steelmaker with the combined capacity to produce more than 70 million tonnes of the alloy every year, second only to ArcelorMittal SA’s capacity of 114 million tonnes, according to the World Steel Association.

“It marks the first step taken by the Chinese steel majors to curb the overcapacity of the industry, and we may see more industry-wide consolidation among smaller players going forward,” said CLSA’s head of China industrial research Alexious Lee.

China’s government is nudging the country’s state-owned industries and factories to consolidate and restructure -- part of president Xi’s so-called supply-side reforms -- to help them withstand the slowest economic growth pace in decades.

The consolidation has fallen behind schedule, as provincial governments have been reluctant to lose grip of vital industries, jobs creators and tax contributors in their local areas.

China has set a target to cut excess capacity in steel by 45 million tonnes by the end of November. A mere 47 per cent of that target was reached as at the end of July, according to the latest available data from the National Development & Reform Commission.

Steel production actually rose by 2.2 per cent in the first eight months of 2016, compared with the same period last year.

China has the capacity to produce 1.2 billion tonnes of crude steel every year, a record level in 2015 that’s also become a source of friction with the US and European Union, leading to complaints of dumping by Chinese steel mills at the World Trade Organisation.

This week, Premier Li Keqiang was urged by US President Barack Obama during their New York meeting to address industrial overcapacity, according to a White House statement.

A successful merger between Baoshan and Wuhan will serve as a role model, giving credence to the attempts by the State Asset Supervision and Administration Commission to execute Xi’s programme, CLSA’s Lee said.

“This bodes well for the industry as we may see them shut down some steel manufacturing plants following the merger,” he said.

A successful combination also augurs well for the next round of merger between Angang Steel and Benang Steel Plates, both in China’s rust belt Liaoning province, said Xu Zhongbo, president of Beijing Metal Consulting.

Baoshan’s parent company Baosteel Group produced 43.3 million tonnes of steel in 2014, while Wuhan’s production fell to 33.1 million tonnes, according to the World Steel Association.

After the merger, both companies are likely to trim their combined capacity to 40 million tonnes, making it the country’s second-largest steelmaker, according to Xu’s estimate.

“They will shut down a number of plants in Shanghai, where the price of land is valuable” and more suitable for real estate development, he said. “They will cut production in Shanghai from 30 million tonnes to 20 million tonnes, while In Wuhan, 10 million tonness of production will be cut.”

The merger will likely be smooth, as Wuhan’s chairman Ma Guoqiang formerly served as president of Baosteel, Xu said.

Trading in the shares of Baoshan and Wuhan have been halted since June 24, when the two companies said they were in merger talks. Baoshan’s shares had fallen 44.8 in the 12 months to 4.90 yuan before trading was suspended, while Wuhan’s shares have fallen 61 per cent in the same period.

The two listed companies had combined market capitalization of US$16.3 billion before their shares were halted, according to Bloomberg data.

Additional reporting by Celine Ge and Sidney Leng