China’s Steel Industry Consolidation Takes Another Step Forward

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Not before time, China’s steel industry is making some progress towards consolidation.

Although both sides deny talks are taking place, a Reuters article details information received from various sources that suggests state-owned China Baowu Steel Group is in talks to take over rival local Anhui province government-controlled Magang Group.

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The two mills are geographically close to each other, with Magang headquartered in Maanshan city in China’s eastern Anhui province, about a four-hour drive from Shanghai, where Baowu Group is based, the article states.

From a product perspective, the two companies are broadly complementary.

Baowu mainly churns out flat steel products, while Magang’s output is split between flat and long steel products used in construction. There may be some consolidation as a result of the merger, but Baowu’s corporate strategy is to reach 100 million tons of capacity by 2021 from its current 70 million tons, so closing capacity is probably not the primary driver.

Reuters reports that in 2017 Baowu produced 65.39 million tons of steel, while Magang produced 19.71 million tons. Their combined output of 85.1 million tons would be just 11.9 million tons below ArcelorMittal’s production last year and ahead of the U.S. total of 81.6 million tons.

Source: Reuters

The combined group, though, would be a potential rival to ArcelorMittal only in tonnage terms. Globally, the firms are poorly represented, with most of Magang’s production consumed domestically and Baowu exporting just 3.8 million tons from its Baoshan Iron and Steel division last year.

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The merger fits with Beijing’s strategic objective of putting 60% of its national steel capacity in the hands of its top 10 (mostly state) producers by 2020, up from a third presently.

Expect a lot more mergers over the next couple of years as Beijing seeks to curtail capacity form the current 1.1 billion tons to some 980 million tons by 2020.

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