China steel company eye M&As to grow
Market forces could finally achieve what Beijing’s mandarins couldn’t - force consolidation in China’s booming steel sector.
By Agencies |
BEIJING/SHANGHAI: Market forces could finally achieve what Beijing’s mandarins couldn’t — force consolidation in China’s booming steel sector.
Steel capacity has more than doubled to 530 million tonnes in the past four years on high prices and strong profits, but the success has also helped boost the price of raw materials in the steelmaking process, such as iron ore.
Expected price hikes for iron ore are putting the squeeze on smaller steel producers, which could see China’s major producers snap up weaker players as they shift to growth through acquisitions rather than expansion.
“Independent small steelmakers may have to quit the market if iron ore prices surge next year, as I expect steel prices to fall in the first half of next year following a slowdown in fixed assets investment,” said a strategist at a state-owned steel trader.
Iron ore, with an iron content of 64%, costs about $50 a tonne, on a free on board basis. But prices have risen 180% over the past 10 years and are expected to rise another 25% in the new contract year that begins in April.
The country is unlikely to meet its target for closing 55 million tonnes of outdated steel capacity by the end of this year but with the looming shakeout China could make more progress shutting down older capacity of the smaller mills. “It will be difficult to reach this year’s target,” Xu Lejiang, chairman of the nation’s largest steelmaker Baosteel Group, said last week. As of August, less than half of this year’s targeted capacity had been shut, he told reporters.
China’s steel-making industry, the world’s largest, is also the most fragmented with hundreds of competing mills. By contrast, a handful of firms dominate Europe, North America, Japan and South Korea, allowing them to control output and support prices.
“The three big international mining companies have 70 to 75% control of iron ore supplies, while on the downstream the six biggest auto firms control 60% of their industry worldwide. Steel companies are stuck between them, and our control ratio is not even 30%, so we need scale and consolidation,” Xu said last week.
Although local protectionism has stalled some mergers, most of China’s top steel executives report their companies will grow through acquisitions. Wuhan Iron and Steel Group is dependent on mergers — such as its recent stake purchase in Kunming Steel surrounding city and lack of approval for new projects hampers its ability to expand its primary base, said president Deng Qilin.
Baosteel wants to grow to 80 million tonnes from 28 million tonnes produced this year, mostly via acquisition, although it also plans at least 25 million tonnes in new capacity. Baosteel’s production at its Shanghai facilities will rise 10% in 2007, after staying flat in 2006.
A greater portion of its growth this year — 13% will come from acquisitions outside its home city.
Beijing is now trying market-oriented policies — such as raising the cost of exports, and legal curbs like enforcing environmental standards, instead of its earlier production- oriented approach, said Li Xiaowei, chairman of Hunan Valin Iron and Steel Group, the nation’s tenth-largest producer and partner of global giant ArcelorMittal.
The Chinese steel industry’s profit margins currently average around 8%, said Shen Wenrong, founder of Shagang Steel, China’s largest private firm. Shagang has been particularly successful in purchasing rival mills, even across provincial lines, but has “basically stopped” building new plants, he said.
Those profit margins will narrow due to higher costs, forcing some mills to close and strong firms to buy weaker ones, he said.
If the government succeeds in controlling capacity, steel makers will still do well in 2008, said Jiang Kaiwen, chairman of Laiwu Steel Group, the ninth-largest producer.
Laiwu’s output will grow 1% to 11 million tonnes this year. The strategist at the state-owned steel trader estimates around 10 million tonnes of capacity could be threatened by rapidly rising costs.
“The National Development and Reform Commission will be happy but it could be a really bad time for steel mills,” she added.
Steel capacity has more than doubled to 530 million tonnes in the past four years on high prices and strong profits, but the success has also helped boost the price of raw materials in the steelmaking process, such as iron ore.
Expected price hikes for iron ore are putting the squeeze on smaller steel producers, which could see China’s major producers snap up weaker players as they shift to growth through acquisitions rather than expansion.
“Independent small steelmakers may have to quit the market if iron ore prices surge next year, as I expect steel prices to fall in the first half of next year following a slowdown in fixed assets investment,” said a strategist at a state-owned steel trader.
Iron ore, with an iron content of 64%, costs about $50 a tonne, on a free on board basis. But prices have risen 180% over the past 10 years and are expected to rise another 25% in the new contract year that begins in April.
The country is unlikely to meet its target for closing 55 million tonnes of outdated steel capacity by the end of this year but with the looming shakeout China could make more progress shutting down older capacity of the smaller mills. “It will be difficult to reach this year’s target,” Xu Lejiang, chairman of the nation’s largest steelmaker Baosteel Group, said last week. As of August, less than half of this year’s targeted capacity had been shut, he told reporters.
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China’s steel-making industry, the world’s largest, is also the most fragmented with hundreds of competing mills. By contrast, a handful of firms dominate Europe, North America, Japan and South Korea, allowing them to control output and support prices.
“The three big international mining companies have 70 to 75% control of iron ore supplies, while on the downstream the six biggest auto firms control 60% of their industry worldwide. Steel companies are stuck between them, and our control ratio is not even 30%, so we need scale and consolidation,” Xu said last week.
Although local protectionism has stalled some mergers, most of China’s top steel executives report their companies will grow through acquisitions. Wuhan Iron and Steel Group is dependent on mergers — such as its recent stake purchase in Kunming Steel surrounding city and lack of approval for new projects hampers its ability to expand its primary base, said president Deng Qilin.
Baosteel wants to grow to 80 million tonnes from 28 million tonnes produced this year, mostly via acquisition, although it also plans at least 25 million tonnes in new capacity. Baosteel’s production at its Shanghai facilities will rise 10% in 2007, after staying flat in 2006.
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A greater portion of its growth this year — 13% will come from acquisitions outside its home city.
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Higher iron ore prices could hurt profit margins for Chinese steel mills, and are likely to force some medium and small mills to shut down production lines. Over the last few years, China’s top planners had tried to force many mills to shut, mostly by restricting approvals, loans and raw materials supply to outdated or small facilities. That has largely backfired, as mills expanded to stay in business.Beijing is now trying market-oriented policies — such as raising the cost of exports, and legal curbs like enforcing environmental standards, instead of its earlier production- oriented approach, said Li Xiaowei, chairman of Hunan Valin Iron and Steel Group, the nation’s tenth-largest producer and partner of global giant ArcelorMittal.
The Chinese steel industry’s profit margins currently average around 8%, said Shen Wenrong, founder of Shagang Steel, China’s largest private firm. Shagang has been particularly successful in purchasing rival mills, even across provincial lines, but has “basically stopped” building new plants, he said.
Those profit margins will narrow due to higher costs, forcing some mills to close and strong firms to buy weaker ones, he said.
If the government succeeds in controlling capacity, steel makers will still do well in 2008, said Jiang Kaiwen, chairman of Laiwu Steel Group, the ninth-largest producer.
Laiwu’s output will grow 1% to 11 million tonnes this year. The strategist at the state-owned steel trader estimates around 10 million tonnes of capacity could be threatened by rapidly rising costs.
“The National Development and Reform Commission will be happy but it could be a really bad time for steel mills,” she added.
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