Baosteel, WISCO mull restructuring to create China`s top mill
Source: www.chinamining.org Citation: Global Times Date: June 30, 2016
China`s two leading steel makers, State-owned Baoshan Iron & Steel Co and Wuhan Iron & Steel Co, announced on Sunday that their parent companies are considering a major restructuring, which would be a milestone for the country`s efforts to cut capacity and raise efficiency among State-owned enterprises (SOEs).
Analysts said that the restructuring of the two major steel makers could be a model for the industry, boosting expectations for more mergers and acquisitions. However, great challenges remain. Analysts said there are always problems integrating major companies, and synergy can be elusive. Restructuring across China`s steel industry would be even more complicated because many major steel companies are overseen by regulators at different levels of government, analysts said.
The rumors turned out to be true.
The country`s two leading steel enterprises, State-owned Baoshan Iron & Steel Co and Wuhan Iron & Steel Co, announced on Sunday that their parent firms, Baosteel Group and Wuhan Iron and Steel (Group) Corp (WISCO), are considering a major restructuring.
Further moves will be released after five trading days, and trading of both company`s shares has been halted since Monday, according to filings on the Shanghai Stock Exchange.
In terms of output, Baosteel ranked second in 2015 among domestic steel makers, after Hebei-based HeSteel Group Co. WISCO ranked sixth.
Restructuring of the two companies would create a mega steel enterprise with annual output of more than 60 million tons, the most in China and the second globally after Luxembourg`s steel giant ArcelorMittal.
Restructuring the two State-owned enterprises (SOEs), both of which are overseen by the State-owned Assets Supervision and Administration Commission (SASAC), marks the government`s latest effort to cut redundant capacity and further consolidate the sector, analysts said. The deal might also serve as a model for future mergers in the industry.
A `model` for the sector
Mergers and acquisitions have been common in the steel sector as the industry has been caught in a downturn for several years. But in most of those deals, a larger steel company acquires a smaller one. A Baosteel and WISCO merger marks the first case of an alliance between two large firms.
As industry leaders, Baosteel and WISCO have each acquired smaller steel mills in the past. For instance, Baosteel acquired Xinjiang Bayi Iron & Steel Co in 2007 and Guangdong`s Shaoguan Iron & Steel in 2011.
WISCO bought a controlling stake in Yunnan`s Kunming Iron & Steel Holding Co in August 2007.
But to survive the winter, even industry leaders need to huddle together.
A merger would greatly increase the competitiveness of both companies, and help them avoid homogenization in their businesses, analysts said.
The merged company would account for about 71 percent of the country`s total capacity of silicon steel, which is used in products like transformers.
It would also make up roughly 60 percent of the capacity for steel products used in the automobile sector, according to Wang Guoqing, research director at the Beijing Lange Steel Information Research Center.
Duplicated facility construction can also be avoided and resources can be better deployed, analysts said.
For instance, the Baosteel plant in Zhanjiang, South China`s Guangdong Province, started production in September 2015. It mainly produces steel products for cars and home appliances and targets the southern China and Southeast Asian markets.
WISCO has a plant in Fangchenggang, South China`s Guangxi Zhuang Autonomous Region that targets the same markets.
The Fangchenggang plant, which is 200 kilometers away from the Zhanjiang plant, started production in March 2016.
"The restructuring of Baosteel and WISCO would set a model for the industry, which will see more mergers and acquisitions in the future," Wang told the Global Times Monday.
Seeking synergy
China has set a goal for the country`s top 10 steel makers to account for 60 percent of the country`s total steel output by 2025, according to an industry guideline released in March 2015. The current figure is about 34 percent, analysts said.
It remains unclear how the restructuring of Baosteel and WISCO will proceed.
It could be a merger between equals, such as the deal between China CNR Corp and CSR Corp that formed CRRC Corp in September 2015.
Or, it could be that one company takes over the other, like what happened when China Minmetals Corp merged with China Metallurgical Group Corp in December 2015, with the latter as a subsidiary of the former.
"Who ends up take a leading role in the restructuring will be a major problem because both Baosteel and WISCO are powerful SOEs," Wang Danqing, a partner at Beijing-based consultancy ACG, told the Global Times on Monday.
Analysts predicted that Baosteel will probably take the lead in the restructuring, given it is a bigger company with healthier finances.
WISCO reported a net loss of 7.5 billion yuan ($1.13 billion) in 2015, the biggest loss among all listed companies on the mainland stock markets.
Baosteel managed to report a profit of 961 million yuan in 2015, though it still represents a 83 percent year-on-year drop.
"The fact that both Baosteel and WISCO are overseen by SASAC makes the deal easier," an official from the China Iron and Steel Association, who declined to be named, told the Global Times Monday.
However, many steel companies are supervised by different regulators. Some are overseen by local governments. Others are overseen by the central government. So merging companies with different supervisory bodies poses additional challenges.
In one notable case, there have been efforts going back years to merge the SASAC-regulated Anshan Iron and Steel Group with Benxi Iron and Steel Group, which is controlled by the government of Northeast China`s Liaoning Province. But no tangible progress has been made so far.
The fact that WISCO Chairman Ma Guoqiang used to work for Baosteel will make the restructuring easier, analysts said.
But the ACG consultant Wang warned that the merger faces many hurdles.
"Integration at the operational level, such as procurement, production and sales, will take a long time," he said, adding that it will be difficult for both companies to be seamlessly integrated.
Amid efforts to cut capacity, China`s total steel output is projected to decline further in 2016 - to some 790 million tons, after dropping for the first time in 30 years to 804 million tons in 2015, Lange Steel`s Wang noted.
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