Will people be shocked if China has the world's largest steelmaker in a couple of years? Will they be even more surprised if all the world's top steelmakers are Chinese companies? Both will probably happen within the next two or three years.

MASS PRODUCTION: A universal mill for heavy rail works at an Anben Iron and Steel Group factory in Anshan, Liaoning Province(GUO DAYUE)

Rankings of the world's top 10 steelmakers have changed greatly during the past two years. China's Baosteel Group Corp. moved up to the present third place from the fifth place in 2007 through restructuring and acquisitions, while Hebei Iron and Steel Group Co. Ltd. entered the top 10 list for the first time in 2008 to rank sixth thanks to its restructuring efforts.

Mergers and acquisitions among steelmakers are far from over. On April 3, China's fourth largest steelmaker, Anben Iron and Steel Group (Anben Group), announced its intention to buy shares of the Panzhihua Iron and Steel (Group) Co. (Pangang) with cash. After the purchase, Pangang will become a subsidiary of the Anben Group. The restructured Anben Group will surpass the country's third largest steelmaker, Wuhan Iron and Steel (Group) Corp. (Wugang), in terms of annual output. Wugang currently is the seventh largest steel producer in the world, but it will lose its place to Anben Group once the deal is done.

"In the coming two years, mergers and acquisitions among Chinese steelmakers will accelerate, and the new structure of the steel industry will be formed," said Zhou Weifu, a researcher at the Institute of Industrial Economics of the Chinese Academy of Social Sciences.

Reorganization plans

The government's goal with restructuring the steel industry is to nurture large and super large steel companies that are internationally competitive, optimize the industry's structure and increase industrial concentration. The government's detailed stimulus plan for the sector issued in March 2009 states that by 2011, Baosteel, Anben Group, Wugang and some other super large steelmakers should be internationally competitive, with annual output exceeding 50 million tons. The plan also aims to create some large steel groups with annual output of 10-30 million tons.

According to the plan, after the restructuring is complete, the total production capacity of the country's top five steelmakers will account for more than 45 percent of the country's total. The production capacity of steel companies in coastal areas and areas along the Yangtze River will account for more than 40 percent of the country's total production capacity.

At present, there are about 1,200 steel companies of different sizes in China. Among them, only 70 are large and medium-sized ones. Compared to other countries, China's steel sector has a much lower industrial concentration. According to data from the China Iron and Steel Association (CISA), the top five domestic steelmakers only contributed 28.61 percent of China's steel output in 2008. Moreover, by the end of 2008, the production capacity of China's steel industry had reached 660 million tons, while its annual output was only 500 million tons for a capacity surplus of 160 million tons.

Zhou said that the low industrial concentration not only restrains improvement of the overall competitiveness of the steel industry, but also weakens the status of China's steel sector on the international market. He said he hopes the government can change this situation through restructuring and M&A of steel companies.

Besides the acquisition of Pangang by the Anben Group, the government will also restructure dozens of steel companies in the next three years as part of its steel sector stimulus plan, by merging Anben Group with Dongbei Special Steel Group Co. Ltd., Baosteel with Baotou Iron and Steel (Group) Co. Ltd. and Ningbo Iron and Steel Co. Ltd., as well as Wugang with Guangxi Iron and Steel Co. Ltd., Zhou said.

But the restructuring of China's steel companies is not just simply a matter of "big fish swallowing little fish" to expand their sizes, but to readjust the industrial structure and product mix. Luo Bingsheng, Vice Chairman of the CISA, told Beijing Review that the industry restructuring must achieve the following goals: control total output, eliminate backward production capacity, innovate technologies, optimize the industrial structure, enhance the quality and international competitiveness of steel companies through promoting structural adjustment and upgrading, and accelerate the transformation of "large companies" to "strong companies."

After the restructuring, the country's total output of iron and steel will drop. The current goal is that China's output of crude steel will be 460 million tons this year, a year-on-year decrease of 8 percent, while the consumption volume will be 430 million tons, a 5-percent drop. By 2011, the output of crude steel will be 500 million tons and the consumption volume will be 450 million tons, with the industry's added value contributing 4 percent to the country's gross domestic product.

Luo said the steel companies are reducing their total output to eliminate backward production capacity and maintain the steady development of the steel industry. At present, there are about 160 million tons of backward production capacity in China's iron and steel industry.

"Restructuring is not a change in the form, nor combination of several companies in name, but it must be a restructuring of the means of production," Luo said. "Small blast furnaces must be replaced by large ones, and machines with a low technological level by those with a high technological level. This is the real restructuring. Only such restructuring can enhance the international competitiveness of the companies."

Ramping up restructuring

"At the moment the Chinese steel industry is at a point where restructuring has to be carried out," said Zhang Xiaogang, General Manager of the Anben Group and Vice Chairman of the CISA, at the session of the National People's Congress held in March.

Zhang said that because of the decline in steel exports, China's iron and steel industry suffered heavy losses in 2008, and this year would be the most difficult one for it to tackle the global economic crisis. It is estimated that China's exports of steel products would drop 80 percent in 2009. Only restructuring can make steel companies extricate themselves from difficulties, he said.