China's second- and sixth-largest steelmakers by output have announced that they've entered restructuring talks, with analysts speculating it could lead to a merger creating the nation's biggest mill.
The discussions highlight China's efforts to overhaul its inefficient state-run steel sector and bolster an economy headed for its slowest growth in decades.
It's a move that's likely to be welcomed by Luxembourg-based ArcelorMittal, the world's biggest steel manufacturing company, as it has long called for consolidation in China, which produces just over half the world's steel. While European and Japanese companies have been forging alliances to restrain supply, China's fragmented industry has a record of producing more steel than it needs and exporting the surplus at prices other makers can't match.
"It would be a very important step in the process and create a clear market leader" in China, said Ingo Schachel, a Commerzbank analyst. "Whether it is a start and there is more to come, that's hard to tell."
The merger of state-run Shanghai Baosteel Group Corp. and Wuhan Iron & Steel Group Corp. would create a company with the capacity to make more than 77 million tons of steel. That would make it second to ArcelorMittal, with 125 million tons.
It may also lead to plant closures as the nation seeks to clear its surplus. Exports are running at record levels, after hitting more than 100 million tons last year, creating a global glut and drawing fire from rivals in Japan, Europe and the U.S.
ArcelorMittal has long argued for more deals among Chinese companies, with billionaire Chief Executive Officer Lakshmi Mittal saying this year the country's industry was lagging behind other regions. Since Mittal Steel Co. bought Arcelor SA in 2006, in the steel industry's biggest takeover, the company has shuttered plants to remove excess capacity in its core markets.
"We need further consolidation as well as capacity rationalization" in China, Aditya Mittal, chief financial officer of ArcelorMittal, told investors in May.
That chimes with Chinese government statements. The chairman of the country's top economic planner, the National Development and Reform Commission, said on Monday that the nation would cut steel capacity by 45 million tons this year. It had already pledged to reduce capacity by as much as 150 million tons through 2020.
Still, not everyone is convinced of much respite for steelmakers elsewhere.
"Consolidation doesn't automatically mean capacity shutdowns," said Kirill Chuyko, head of equity research at BCS Global Markets. "I wouldn't expect this to be a turning point. After all, the Chinese won't shoot themselves in the foot by reducing steel production more than necessary."
Business on 06/28/2016