China Eyes Steel Merger to Create Mill to Rival ArcelorMittal

China’s second and sixth-largest steelmakers by output said they are in restructuring talks, which could presage a merger that would create the nation’s biggest mill and a company with the scale to rival the likes of ArcelorMittal SA.

Trading was suspended in the listed units of state-run Shanghai Baosteel Group Corp. and Wuhan Iron & Steel Group Corp. as their parents discuss “strategic restructuring,” according to separate statements on Sunday to the Shanghai Stock Exchange, which didn’t elaborate further. The two companies had a combined market value of $16.3 billion as of Friday’s close, and capacity of more than 70 million metric tons.

The talks highlight China’s efforts to overhaul its inefficient state-run sector and bolster an economy headed for its slowest growth in decades. A merger of the two would be the biggest in China’s metals sector since December, when China Minmetals Corp., its biggest metals trader, agreed to buy a government-owned engineering and mining group, as the nation seeks to reduce overcapacity while creating globally competitive firms.

“The merger of Baosteel and Wuhan Steel fits with the government strategy of improving efficiency and reducing competition and overcapacity,” said Xu Xiangchun, chief analyst at consultancy Mysteel Research. “With these two leading the effort there might be more mergers ahead.”

Steel Output

China’s steel output has peaked while domestic demand is saturated, Chen Derong, general manager at Baosteel, told an industry conference last month. At the same time, its exports are running at record levels, creating a global glut of the metal and drawing fire from competitors from Japan to the U.S. China’s crude steel-producing capacity reached a record 1.2 billion tons at the end of last year, according to the China Iron & Steel Association. 

A combination would be “positive for Baosteel in the long-term as the two companies jointly control over 60 percent of autosheet and over 80 percent of the silicon steel market in China,”according to a report by Citigroup Inc. on Monday. Both companies are directly under the State-owned Assets Supervision and Administration Commission of the State Council, China’s cabinet.

A combined company would leapfrog domestic rival Hesteel Group in terms of production and put it just behind ArcelorMittal in the global rankings. Both firms employ more than 100,000, according to Citi, which said it expects more mergers of China’s state-owned enterprises on the heels of any Baosteel-Wuhan restructuring.

Source: http://finance.yahoo.com/