China's major steel company Baosteel has unveiled a plan to acquire Wuhan Iron and Steel and thereby will become the world's second largest steelmaker, after ArcelorMittal.
According to announcements posted on the Shanghai Stock Exchange website on Tuesday evening, state-owned Baosteel will issue A-shares to all transferring shareholders of Wuhan Iron and Steel to absorb the latter,also a large state-owned steel enterprise based in Hubei Province.
The restructuring plan still needs approval from the shareholders of both listed firms.
Last year, Wuhan Iron and Steel reported a loss of 7.5 billion yuan (1.1 billion U.S. dollars). Baosteel's profits shrank by more than 80 percent to its lowest level in 18 years.
The crude steel output of Baosteel and Wuhan Iron and Steel was 34.9 million tonnes and 25.8 million tonnes respectively last year. After the merger, the output of Baosteel will exceed that of HeSteel Group based in Hebei Province, to rank first in China.
Shares of the two firms have been suspended from trading since late June due to the planned restructuring.
China plans to cut steel production capacity by 100 million tonnes to 150 million tonnes by 2020, according to a government plan unveiled in February.
Chen Derong, president of Baosteel, said the merger will coordinate various aspects of the business, such as logistics and R&D.
Both companies produce and sell auto sheets. Now, long-distance transportation can be avoided and costs cut, he said.
Baosteel already planned to cut 9.2 million tonnes of capacity by 2018.Together, the production of both companies can be cut further, he said.
The market share of certain core products, such as high-end auto sheets, will be greatly expanded in China after the restructuring, according to a research report by Everbright Securities. Meanwhile, the profitability of these products will be improved and the company's pricing ability for upstream iron ore strengthened, it added.
Wang Bei, researcher with mysteel.com, said the restructuring will contribute to the balance between supply and demand through production adjustment and squeeze out ineffective or poor supply.
After the merger, the new entity will account for 7.6 percent of the country's crude steel output. Industry experts expect more acquisitions among steel producers.
