China's two leading steel makers, State-owned Baoshan Iron & Steel Co and Wuhan Iron & Steel Co, announced on Sunday that their parent companies are considering a major restructuring, which would be a milestone for the country's efforts to cut capacity and raise efficiency among State-owned enterprises (SOEs). Analysts said that the restructuring of the two major steel makers could be a model for the industry, boosting expectations for more mergers and acquisitions. However, great challenges remain. Analysts said there are always problems integrating major companies, and synergy can be elusive. Restructuring across China's steel industry would be even more complicated because many major steel companies are overseen by regulators at different levels of government, analysts said.
The rumors turned out to be true.
The country's two leading steel enterprises, State-owned Baoshan Iron & Steel Co and Wuhan Iron & Steel Co, announced on Sunday that their parent firms, Baosteel Group and Wuhan Iron and Steel (Group) Corp (WISCO), are considering a major restructuring.
Further moves will be released after five trading days, and trading of both company's shares has been halted since Monday, according to filings on the Shanghai Stock Exchange.
In terms of output, Baosteel ranked second in 2015 among domestic steel makers, after Hebei-based HeSteel Group Co. WISCO ranked sixth.
Restructuring of the two companies would create a mega steel enterprise with annual output of more than 60 million tons, the most in China and the second globally after Luxembourg's steel giant ArcelorMittal.
Restructuring the two State-owned enterprises (SOEs), both of which are overseen by the State-owned Assets Supervision and Administration Commission (SASAC), marks the government's latest effort to cut redundant capacity and further consolidate the sector, analysts said. The deal might also serve as a model for future mergers in the industry.
A 'model' for the sector
Mergers and acquisitions have been common in the steel sector as the industry has been caught in a downturn for several years. But in most of those deals, a larger steel company acquires a smaller one. A Baosteel and WISCO merger marks the first case of an alliance between two large firms.
As industry leaders, Baosteel and WISCO have each acquired smaller steel mills in the past. For instance, Baosteel acquired Xinjiang Bayi Iron & Steel Co in 2007 and Guangdong's Shaoguan Iron & Steel in 2011.
WISCO bought a controlling stake in Yunnan's Kunming Iron & Steel Holding Co in August 2007.
But to survive the winter, even industry leaders need to huddle together.
A merger would greatly increase the competitiveness of both companies, and help them avoid homogenization in their businesses, analysts said.
The merged company would account for about 71 percent of the country's total capacity of silicon steel, which is used in products like transformers.
It would also make up roughly 60 percent of the capacity for steel products used in the automobile sector, according to Wang Guoqing, research director at the Beijing Lange Steel Information Research Center.
Duplicated facility construction can also be avoided and resources can be better deployed, analysts said.
For instance, the Baosteel plant in Zhanjiang, South China's Guangdong Province, started production in September 2015. It mainly produces steel products for cars and home appliances and targets the southern China and Southeast Asian markets.
WISCO has a plant in Fangchenggang, South China's Guangxi Zhuang Autonomous Region that targets the same markets.
The Fangchenggang plant, which is 200 kilometers away from the Zhanjiang plant, started production in March 2016.
"The restructuring of Baosteel and WISCO would set a model for the industry, which will see more mergers and acquisitions in the future," Wang told the Global Times Monday.
