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China economy

China’s biggest steelmaker plans to boost capacity while Beijing seeks cut

Baowu Steel aims to consolidate position by increasing output as government plans to reduce output take toll on smaller private firms

PUBLISHED : Saturday, 23 September, 2017, 12:04pm
UPDATED : Saturday, 23 September, 2017, 12:04pm

China’s biggest steelmaker, which was created a year ago by merging two large struggling state-owned steel plants, is trying to boost its total annual output capacity from the current 60 million tonnes to 100 million tonnes, according to its general manager.

The ambitious plan by China Baowu Steel Group Corp, which is now ranked as the world’s second biggest steel producer next to ArcelorMittal, was announced as Beijing started to shut down many private steelmakers for environmental reasons and continued with plans to phase out obsolete facilities.

“In the next decade or two, China’s steel capacity may fall to 400-500 million tones. Baowu plans to raise its market share to 20 to 25 per cent,” the group’s general manager Chen Derong told a steel forum in Shanghai on Wednesday.

“It is an inevitable trend that China’s crude steel output will fall, but China Baowu will increase capacity. Our capacity target is set at 100 million tonnes,” Chen was quoted by China News Service, a state agency, as saying.

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Chen said the group was negotiating possible takeovers or mergers with smaller steelmakers, mainly state-owned ones.

China’s drive to cut excessive industrial capacity is leading to the emergence of bigger and more powerful state players in industries like steel and coal – sometimes at the cost of private businesses, analysts said.

“In many traditional industries, private businesses are further marginalised,” said Hu Xingdou, a professor from Beijing Institute of Technology.

“It’s really not a good sign for China that there are more and more Chinese state businesses in the Fortune 500 list.”

China, which contributes half of the global crude steel production, booked 808 million tonnes in steel output in 2016, slightly growing from the output of 804 million tonnes in 2015, according to data by the National Bureau of Statistics.

Chen said the country’s steel market featured over 500 manufacturers and other unregistered smaller mills and the volatility of the sector had a major impact on the overall economy.

China Baowu was formed by a merger of Baosteel Group and Wuhan Iron and Steel, both large state-owned enterprises, at the end of 2016.

Official data said China cut 65 million tonnes of excessive steel capacity last year and is aiming to cut at least 50 million tonnes this year.

The rebound in steel prices since the start of the year has pushed up the earnings of steelmakers.

“All steelmakers hope to expand production and hope their rivals will reduce capacity. But it is another issue as to whether market demand, government policy or the need for environmental protection will allow them to do so,” said Lin Boqiang, a professor of energy policy with Xiamen University.

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Zhong Zhengsheng, research head of CEBM Group, a think tank with Caixin Insight Group, said in July at an economic forum in Renmin University, that one of the risks for the supply-side structural reform is the improving performance in state-owned firms at the expense of private industrial firms.

He called for measures to boost the confidence of private enterprises at a time when state firms are becoming stronger and bigger.

Wei Yingsong, an analyst with a steel consultancy Mysteel.com said the government’s policy regarding the steel sector was to increase concentration in the industry and reduce liabilities through mergers and acquisitions.

“It is much easier for state firms to undertake mergers and acquisitions to consolidate the steel industry. And over the long term, private firms will feel the pressure to participate,” said he.