A ship carrying iron ore docks at a Magang Group wharf in Maanshan, east China's Anhui Province, in April 2018 (XINHUA)

China Baowu Steel Group Corp., China's largest steel producer, has acquired a controlling stake in another steel giant Magang Group, according to an announcement by Maanshan Iron and Steel Co. Ltd. (Masteel), a Shanghai- and Hong Kong-listed company that runs Magang's iron and steel business.

The Anhui Provincial State-Owned Assets Supervision and Administration Commission, which previously held 100 percent of Magang's equity interest, has entered into an agreement to transfer 51 percent to Baowu for free. After completion of the transfer, Baowu will also become the indirect de facto controller of Masteel by holding 45.54 percent of its total share through Magang, said the announcement.

Giant connection

"Baowu and Magang are complementary to or overlap each other in markets and product varieties, but such overlap doesn't matter because the two companies can coordinate with each other in product positioning and development, division of market shares and procurement of raw materials," Xu Xiangchun, Information Director of Mysteel.com, told 21st Century Business Herald.

In 2018, Baowu and Magang had crude steel production capacity of 70 million tons and 21.7 million tons, respectively, while their output volumes of crude steel stood at 67.43 million tons and 19.64 million tons, respectively, with a combined output of 87.07 million tons, according to figures from the China Iron and Steel Association.

ArcelorMittal, the world's largest steel company based in Luxembourg, stated in its annual report that it produced 92.5 million tons of crude steel in 2018. That means after the takeover of Magang, Baowu will be much closer to ArcelorMittal's crude steel output.

Li Jun, an analyst with Ping'an Securities Co. Ltd., explained that Magang is a major supplier of China's bullet train wheel hubs, while Baowu has no business in the field. Magang's products such as hot- and cold-rolled, color-coated and galvanized sheets will form a complete sheet product system with Baowu that produces high-end sheet products, making the reorganized company more competitive in this area.

In addition, Li said although east China is the largest construction material consumer in the country, Shanghai-headquartered Baowu provides almost no products to this region, so Magang, which is based in Maanshan, east China's Anhui Province, can fill Baowu's gap in this field with products such as high-speed wire rods and bars.

"Baowu's goal is to become a steel organization with an annual output of over 100 million tons, but it is unlikely to realize this goal by relying only on itself, making acquisitions necessary. Hence, Baowu may have new targets in the future," Xu said.

Formed in December 2016 by the merger of Baosteel Group and Wuhan Iron and Steel Corp., Baowu is now poised to expand further.

The recent takeover will further consolidate its position, but it is not its ultimate goal. In its development plan for 2016-21, Baowu vowed to increase its production capacity to 80-100 million tons by 2021.

"We have a short-term goal of increasing the production capacity to 80-100 million tons, so industrial reorganization is a road we must take in the future instead of expanding production capacity through investing in new production lines," said Chen Derong, Baowu Chairman, in an earlier interview. "This is also a process where industrial concentration is increased step by step."

An employee works at a strip steel factory in Tangshan, north China's Hebei Province, on May 5 (XINHUA)

Industrial trends

The concentration of China's iron and steel industry is still at a low level, however. According to a 21st Century Business Herald report, in 2017, the top two steel companies in the Republic of Korea contributed 89.2 percent to the country's total steel output; the top three steel companies in Japan produced 81.5 percent of the steel output in the country; the top four steel producers in Russia accounted for 78 percent to the country's total steel output; and the top three U.S. steel companies produced 57.7 percent of the country's steel output. In China, in the same year, the aggregate output of the top 10 steel producers accounted for only 36.9 percent of the country's total.

In September 2016, the State Council issued a guideline on the reorganization of the iron and steel industry, establishing a target that by 2025, 60-70 percent of the country's steel output should come from about 10 top producers, including three or four steel groups each with an annual output of 80 million tons as well as six to eight steel groups each with an annual output of 40 million tons.

"At present, China's steel market is almost saturated and the industry is now quite mature, so industrial reorganization and integration will be natural," Xu said. "China's iron and steel industry has long been large but not strong and development is not concentrated. To be stronger, the industry must be reorganized."

"Reorganization of the iron and steel industry is likely to accelerate, which is in line with both the orientation of national policy and the general trend of the industry. It will also serve as an internal impetus for the development of steel companies," Li Xinchuang, President of the China Metallurgical Industry Planning and Research Institute, said at a forum on the steel industry held in Hancheng, northwest China's Shaanxi Province, on June 15.

In the future, according to Li Xinchuang, the number of steel producers with an annual output of 5-15 million tons will significantly decrease, whereas steel giants producing 100 million tons and more will emerge.

"In the next three to five years, steel producers of various sizes must decide which groups to reorganize with," Yang Haifeng, Chairman of Shaanxi Iron and Steel (Group) Co. Ltd., said at the forum, adding that through reorganization, the iron and steel industry can realize the goal of optimizing industrial structure, accelerating upgrading, increasing concentration and improving competitiveness.

"In 2019, the Chinese iron and steel industry, in addition to controlling total output, closely following the changes in the demand structure and better serving clients, must accelerate the reorganization of enterprises in accordance with market rules," Li Xinchuang concluded.

Copyedited by Rebeca Toledo

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