Beijing, on Feb. 7, released a “Guiding Opinion” that urged steel firms to accelerate mergers and acquisitions (M&A) to form mega steel conglomerates.
Three state departments issued the statement. They were the Ministry of Industry and Information Technology, the Ministry of Ecology and Environment, and the National Development and Reform Commission.
Within the day of the announcement, steel stocks were fueled up substantially, with speculations growing on which steel firm would be brewing a merge.
China is also looking to increase iron ore output and more scrap steel imports. It said the move was for a greener ferrous sector.
A keen push for consolidation through M&A
Mergers and acquisitions have become one of the key focuses of China’s steel industry.
According to the China Metallurgical Industry Planning and Research Institute, the consolidation of China’s domestic steel industry is under 40%.
At the end of 2020, the country’s Ministry of Industry and Information Technology issued that by 2025, the top 5 steel companies should achieve 40% of industrial M&A, with a 60% target for the top 10 steel firms.
By the end of 2021, China’s top 10 and top 20 steel producers accounted for 40.39% and 54.85% of China’s total steel production, respectively.
At present, state-backed steel companies have already taken over 7 of the top 10 steel producers globally.
Among the M&A spree, state-backed China Baowu Iron & Steel Group has been the most remarkable example.
Initially, it was established in 2016 when China’s Baosteel Group and Wuhan Iron and Steel Group (WISCO) merged. In 2020, it rose to become the world’s largest steelmaker through consolidation.
One of the giants Baowu took over was ArcelorMittal of Luxembourg, the biggest producer globally.
In 2019, the Anhui state-owned Assets Supervision and Administration Commission gave Baowu a free 51% stake in Maanshan Iron and Steel Group, and Baowu merged with the firm. In 2020, Shanxi state-owned Assets Operation Company left Baowu a free 51% stake in Taigang Group, and both companies tied up after Baowu acquired the share.
Then, Baowu successively took over Sinosteel Group and became the de facto controller of Chongqing Steel. In 2021, Baowu Group also merged with Kunsteel Holdings and Shansteel Group. As a result, its crude steel production capacity also approached 150 million tons, accounting for about 14.2% of the total Chinese production capacity, further stabilizing its position as the world’s No. 1 in crude steel production.
Baowu’s profile has made it a typical example of the Chinese regime’s tenacious effort in merging and reorganizing steel companies.
Chen Derong, chairman of China Baowu Steel Group and the China Iron and Steel Association, said both state-owned and private steel companies in the mainland are all rushing for M&A. Many major steel enterprises with a capacity of more than 50 million tons have already emerged.
Chinese mouthpiece Global Times had put it that the Chinese regime aims for a more robust and less fragmented industry. But is that the real purpose of assembling steel giants?
International voice and price power
The series of mergers and acquisitions by Baowu Group, some analysts believe, is Beijing’s return to the planned economy. However, Hu Qimu, chief researcher of China Steel Economic Research Institute, thinks the reason is that China wanted to be self-sufficient with iron ore. At present, the country’s iron ore dependence on foreign countries exceeds 80%.
In 2021, the price swings of iron ore brought a series of problems to industrial development and adversely affected the downstream manufacturing industry. Therefore, pushing for consolidation could reduce the dependence on imported iron ore and increase the pricing power of upstream mines at the same time.
In January last year, the Securities Times (STCN), citing a senior executive of a Chinese steel firm, that if the industrial concentration of China’s top 10 steel companies could reach 60%, it would enhance China’s negotiating power with overseas iron ore giants. STCN is a Chinese official media.
For example, Baowu, because of its massive size, needs 200 million tons of iron ore a year. This demand buffed up the weight of the contract, making it more enticing.
If China were to negotiate with Brazil for 30% of that bulk supply, Brazil would see a deal to supply China with more than 60 million tons of iron ore annually. Naturally, such a large contract would get the European country interested. But, then, China would set out its conditions, and the promising offer may convince Brazil to accept them.
Such a national effort could grant China a mighty pedestal overseas. Beijing could ask companies interested in doing business with it to compromise on specific values, such as human rights.
Strengthening local control and power
Over the past decade, Beijing has been trying to merge and reorganize but cannot do so because of local authorities.
Steel giant Shougang Group, initially located in Shijingshan District, Beijing, was relocated to Tangshan, Hebei, more than a decade ago. At that time, the relocation caused many controversies. Mostly it was on how to balance the ownership of huge taxes? Would Beijing be seizing the fund? Or Hebei? Both city authorities wanted to grab the money whether the company was moving out or moving in.
Shougang is affiliated with the Beijing Municipal State-owned Assets Supervision and Administration Commission. Part of its VAT and personal income tax are registered in Shijingshan, which accounted for more than 60% of the district’s finance taxes.
At the time, 75% of Shougang’s VAT went to the state, with 12.5% staying in Beijing and 12.5% remaining in Shijingshang. As it moved to Tangshan in Hebei province, both Beijing and Shijingshan governments lost substantial revenue. In the end, their dispute was only resolved through a tax-sharing system.
Turning back to Baowu Steel Group, who would the tax go to if it acquired WISCO? The situation is different now because China’s national and local taxes have merged, and they are all owned by the central regime.
Therefore, through M&A, the central regime can regain financial power from local ones. When the latter needs money to function, the central authority will handle their finances instead of private companies.
But as the regime controls the money, distressed officials will intensify their raid of private enterprises if it restricts financing to the local ones.
Yet, a national frenzy for M&A will also raise an issue with employment, as large steel mills usually have tens of thousands of workers. In addition, a combined company will make many employees in similar areas redundant from each firm.
WISCO, which merged with Baowu, had 80,000 employees beforehand. When both companies integrated, between 40,000 to 50,000 people were laid off.
This mega-merger and reorganization rush of steel companies will undoubtedly affect the employment of many people. However, the country’s current economic health is not promising. So, would there be significant aftermath arriving for China’s massive consolidation push?
How strong will the new Chinese steel giants be?
Becoming a mammoth in the industry does not always mean it offers quality service. Such as, when it comes to kitchen utensils and knives, customers tend to opt for German and Japanese brands or at least American.
Special steel, for example, is often considered an important indicator of whether a country can become a steel powerhouse. This material has a wide range of uses, commonly in machinery, automobiles, military industry, chemical industry, household appliances, ships, transportation, railways, and so on.
Germany and Japan are both leaders in special steel production processes and technology. On the other hand, Chinese steel enterprises have not achieved high-precision technology.
Xin Renzhou, a former inspector of China’s Ministry of Industry and Information Technology, said last year that the country’s industry has three problems.
According to Chinese language Mysteel, Xin Renzhou said, “first, some steel varieties cannot meet market demand; second, the quality of some key materials still needs to be improved; third, the quality stability of some steel products is not high.”
He added, “Especially in key areas, poor quality stability has become one of the important reasons that hinder the large-scale entry of this country’s steel into high-end fields.”
On the reasons behind the three shortcomings, Xin put it that:
- First, the foundation is weak, and the innovation capacity is insufficient
- Second, the overall level of the industry chain is low and the system innovation capacity is poor
- Third, the innovation chain is not perfect and the connection between material production and application is not there.