Mergers and acquisitions are the latest trend in the Chinese steel industry.

Last August, two of the top 10 Chinese steel manufacturers Anshan Steel and Benxi Steel, both in Liaoning Province teamed up to form Anben Steel Group, with an estimated annual production capacity of 20 million tons.

This March, Shanghai Baosteel entered into a strategic partnership with August First Steel Co in Xinjiang Uygur Autonomous Region. Their ultimate goal is to incorporate the latter into Baosteel.

Overseas investors are also on the move. Last June, Mittal Steel, the world's largest steel maker, paid US$338 million for a 36.67 per cent stake in Valin Steel Tube & Wire in Hunan Province.

Another global steel giant, Arcelor Steel, acquired 38.4 per cent in Laiwu Steel Corp in Shandong Province with an investment of 2.08 billion yuan (US$260 million) this February.

Behind the mergers are an ambitious search for synergy and a growing demand for industrial restructuring.

No surprise then that restructuring and consolidation are high on the agenda of the fourth China International Steel Congress, being held in Beijing today. Important industrial issues will be discussed by participants from all over the world.

Experts say consolidation will help lift the concentration ratio in the Chinese steel industry. Low concentration ratio is one of the reasons behind the current chaos and vicious competition.

Statistics show that in China, only 15 companies have a production capacity of more than 5 million tons each. Their combined outputs account for 44 per cent of the country's total. This means the other 56 per cent comes from numerous small and medium-sized steel makers.

Small steel companies with weak technological strength have long been accused of low efficiency in the use of limited mineral resources. Some insiders even attributed the raw material price rise to large iron ore demand from the small factories.

Environmental groups also blame small plants for environmental damage, since many of them are reluctant to invest in pollution control facilities.

Industrial restructuring will hopefully lead to reduction of the number of such minor steel plants and thus contribute to the construction of a resource-efficient economy in China.

Experts point out that scale economy is one of key factors to determine profitability, especially in such capital-intensive industries as steel.

The recent rounds of mergers and acquisitions are expected to help top Chinese players sharpen their competitive edge and promote healthy growth of the entire industry.

Right time

With adjustments in macro economic policies, related sectors such as real estate, shipbuilding and machinery entered a low-growth stage, resulting in a slowdown in steel demand.

In contrast, buoyed by booming investment, a large amount of steel was still rolling out of factories throughout the country.

The current production capacity of the Chinese steel industry is 120 million tons beyond market demand, the Economic Information Daily quoted Ma Kai, minister of the National Development and Reform Commission (NDRC), as saying.

Due to this conflict between demand and supply, the last three quarters of 2005 saw continuing decline in steel prices.

Meanwhile, price hikes for iron ore, power, coal, and oil further contributed to shrinkage of profit margins. As a result, steel companies saw lacklustre performance on stock markets last year. Technically speaking, it was the right time for mergers and acquisitions.

With value of steel companies slashed, sometimes even undervalued according to insiders, merger costs dropped down significantly.

In addition, the macro economic environment today is friendly to merger deals. The Steel Industry Development Policy, issued by NDRC last July, makes it clear that authorities encourage industrial restructuring via mergers and acquisitions.

Top Chinese steel manufacturing groups have moved quickly in response. They have looked for suitable targets, absorbed needed resources and honed competitiveness.

A new industrial pattern is emerging where industry heavyweights take up bulk of the market share.

Alliances between leading industrial players have been the highlight of this round of mergers and acquisitions. Such co-operation can only lead to win-win results.

For instance, in Anben Steel's case, both steel companies are equipped with state-of-the art technology and regarded as key production bases for fine steel sheet.

The establishment of the new group company is expected to give an impetus to industrial restructuring and product upgrading in Northeast China.

In Baosteel's case, August First Steel Co is situated in the resource-rich Xinjiang region and neighbours Central Asian countries. All these are tempting to Baosteel, which relies heavily on iron ore imports.

As a leading steel manufacturer in the northwest region, August First Steel produced 3 million tons of steel in 2005.

Because of the rapid development of western regions, the company has enjoyed growing demand for its construction-use steel.

However, in the long run, it will encounter a growth bottleneck due to transportation inconveniences and cost increase, said a source at the China Iron and Steel Association.

Baosteel's widespread distribution network, leading-edge technologies and advanced management are hence desirable to its frontier partner.

Overseas investment

Foreign investors haven't missed their chance to gain access to the Chinese steel market. Mittal and Arcelor poured millions of dollars into their acquisition ventures in China, adding new forces to their global industrial chain.

They value the Chinese market for its surging domestic demand. China's New Countryside Scheme and growing urban expansion seem to coincide with their optimistic attitude.

In the absence of restrictions on foreign investment in the Chinese steel industry, the world steel icons would have gone further.

Chinese insiders are divided over the inflow of foreign capital.

Some have applauded the introduction of strategic investors. Their foreign partners brought with them exactly what was needed immediate fund flows, worldwide distribution network, advanced technologies and managerial expertise.

Some are more concerned about the safety of the key national industry, calling for protective policies.

In developed economies, a comprehensive census system aimed at the protection of industry safety is well established, covering laws, securities exchange operations and administrative approval.

(China Daily 04/19/2006 page6)