Pooling resources will help upgrade industry, slash capacity glut
The nation's largest steel company, China Baowu Steel Group Corp, was inaugurated on Thursday in Shanghai, creating the world's second-largest steel producer in a move to upgrade the country's steel sector and tackle overcapacity.
The company is the result of a merger of two giant steelmakers, Baosteel Group and Wuhan Iron and Steel (Group) Corp (WISCO), which was approved by the State Council, China's cabinet, in September.
The new entity will surpass Hebei Province-based HeSteel Group as the largest in China and become the world's second-largest steelmaker only after Luxembourg-based ArcelorMittal.
In 2015, the crude steel output of Baosteel was 34.9 million tons, while that of WISCO was 25.8 million tons, according to data compiled by the Beijing-based Lange Steel Information Research Center.
"The merger created a steel monolith that will have a production capacity of 60 million tons per year," Wang Guoqing, director of Lange, told the Global Times on Thursday.
Baosteel previously announced plans to cut production by 9.2 million tons in the next three years, while WISCO set a target of 4.42 million tons. The combined company will cut another 3 million tons.
"Baowu will cut in total 16.6 million tons of steel by the end of 2018, which will help tackle the overcapacity issue," said Wang.
The move could also be seen as significant progress in State-owned enterprise (SOE) reform and supply-side reform, according to an announcement posted on Baowu's website on Thursday. The company will encourage innovative management and employ professional managers, which is also in line with its strategy of upgrading its products and enhancing its competitiveness, the announcement noted.
"The merger could help accelerate the process of cutting capacity and easing intense competition in the market by pooling staff, technologies and resources," Li Xinchuang, president of the China Metallurgical Industry Planning and Research Institute, told the Global Times Thursday.
Moody's Investors Service said on Wednesday that the outlook for Asian steelmakers is negative in 2017 as earnings will weaken amid declining production and lower profitability.
Asian steel output will fall in 2017 because demand in China, which accounts for about three-quarters of Asian steel production, will contract, while rising trade barriers will constrain exports from Asia, according to Moody's.
Demand will also fall in China because property sales are likely to decline moderately following the tightening of regulatory measures in September and October, according to analysts.
China will cut crude steel output by 100 million tons to 150 million tons in the five-year period starting from 2016 and promote industry restructuring, the central government said in February.
The Chinese government said it encourages mergers and acquisitions as an effective way of tackling the issue.
As Baosteel and WISCO are complementary in products such as cold-rolled plates used for cars, dip galvanizing plates used for cars and grain-oriented silicon steel, the market share of those products in China will increase after the merger, Li noted.
"The combined company pools resources including marketing channels and services, not only nationwide but also overseas, and that means there is great potential for Baowu," he said.
The market share of those three products would surpass 40 percent, 50 percent and 80 percent respectively in China, and the new company's vehicle steel plates will rank among the top three in the world, Wang noted.
"The scale effect of this deal is enormous, and it will help the country's steel industry rebrand itself worldwide," she said.
Shares of Baosteel and WISCO, both listed on the Shanghai bourse, were suspended on Thursday.