Enter the Dragon II: ArcelorMittal Gets a Foothold in Chinese Automotive Steel

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In the first installment of Enter the Dragon, Sohrab Darabshaw explained how ArcelorMittal hopes to grab a large chunk of the Chinese automotive industry’s sales with its new joint venture plant, VAMA, in Loudi, Hunan province.

A report by news agency Bloomberg said China, the world’s top producer and consumer of steel, is considering scrapping the near-decade old ban on foreign companies owning steel mills in the provinces. This move could act as a catalyst for global mills to revive a push into China’s US $423-billion steel sector where demand is seven times higher than in the next biggest market, the US.

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Luxembourg-based ArcelorMittal previously tried to crack the Chinese market by attempting to take majority control of China Oriental Group in 2008. That plan never came to fruition and CEO Lakshmi Mittal acknowledged as much to steel analysts, saying that China has already built overcapacity in the iron and steel sectors, and now needs consolidation.

The question remains whether foreign investors would jump in straightaway to invest in Chinese steel mills or if they would prefer to wait and watch as the new excess capacity situation in China unfolds. Smaller than 5 million tons per annum capacity mills may be the first target of foreign investors.
Chinese analysts have said opening the Chinese steel market to foreign investment could be a “game changer,” and part of a wider push by China’s leadership to boost foreign investment and open up its state-owned industries. China has the world’s fastest-growing automotive market, recording a 16 percent increase in car sales to 18 million units last year.

Just before cutting the ribbon, Mittal told the assembled media in Loudi that his firm would focus on making steel for industries including vehicles and white goods in China.
VAMA plans to supply international automakers such as Volkswagen, GM, Ford, PSA, Daimler-Benz, BMW, Toyota, Honda, Renault, Fiat and Nissan, as well as domestic manufacturers including Geely, Chery, Dongfeng, Guangzhou Auto, Shanghai Auto and Changan.

ArcelorMittal has made the proper play, spot on. By opening a new, state-of-the-art plant in Loudi it’s also throwing the gauntlet at aluminum manufacturers who have been making loud claims of producing cheaper and lighter replacements of automotive steel for better fuel efficiency. Much of the auto sales growth in the coming years will be from China, India and the Middle East, and the VAMA plant is ideally located to cater to these markets.

The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

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