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China steel groups merger set to exceed US output

China steel groups merger set to exceed US output
Issue Time:2019-06-05

A planned merger of China’s largest steelmaker and a domestic rival is set to create a group whose combined production exceeded that of the entire US steel industry last year, as Beijing pushes forward with efforts to consolidate its vast steel sector.

 

According to a stock exchange filing on Sunday, China Baowu Steel Group will buy a majority stake in smaller producer Magang Steel to strengthen its “international competitiveness”.

 

The value of the deal was not disclosed. The two companies had combined crude steel output last year of 87m tonnes, surpassing total US steel output of 86.6m tonnes, according to World Steel Association data.

 

That would put the combined group only slightly behind the world’s number one steelmaker, ArcelorMittal, which produced 92.5m tonnes of crude steel in 2018.

 

The merged group would have a combined capacity of 90m tonnes, and further expansion “could see the company become the world’s largest steel producer within the next two to three years”, according to analysts at S&P Global.

 

Beijing aims to consolidate its fragmented steel sector so that the top 10 producers account for 60 per cent of steel production, up from 35 per cent now. Beijing has forced steelmakers to cut 200m tonnes of capacity since 2016.

 

Baowu is a product of a 2016 merger that made it China’s largest steelmaker. “Baowu’s acquisition of Magang makes it the second-largest steelmaker globally, and extends its dominant position domestically,” said Tomas Gutierrez, Asia Editor at Kallanish Commodities.

 

Baowu Steel has announced a production target of 100m tonnes by 2021, and China’s strict limits on the construction of new capacity mean it is likely to meet the target through further acquisitions. 

 

China is the world’s top consumer of steel. It used 828m tonnes last year as its own production grew 6.6 per cent year on year to a record 928m tonnes, driven by strong demand from the property sector. 

But falling car sales in China have begun to erode steel demand, and the possibility of output exceeding domestic demand this year raises the prospect of domestic steelmakers using exports as a pressure valve — something that would depress prices globally.

 

Baoshan Iron and Steel Co, the main listed arm of Baowu, has been hit by slowing Chinese demand for steel this year, with net profit falling 46 per cent in the first quarter compared with the same period last year to Rmb2.7bn ($391m).

 

State-funded infrastructure spending has helped prevent a sharper slowdown in demand. “As Chinese steel demand is reaching a structural peak, only state spending can prevent a slump which would hurt steelmakers globally,”

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