[SMM special topic] Baowu Iron and Steel Group merger and reorganization apocalypse in the next 20 years steel production capacity halved?

As early as June 26, 2016, WISCO shares and Baosteel shares issued a suspension announcement, announcing that the parent companies of the two listed companies, WISCO Group and Baosteel Group, are planning a strategic restructuring. Three months later, ST8 Steel announced that SASAC had agreed to the joint restructuring of Baosteel Group and Wuhan Iron and Steel Group. After the merger, Baowu Iron and Steel Group overtook Hebei Iron and Steel to become the largest iron and steel enterprise in China and the second largest steel enterprise in the world.

The acquisition of Maanshan Iron and Steel Co., Ltd., the world's largest steel company, may only be the first step.

The world's largest steelmaker is Luxembourg-based ArcelorMittal, with a crude steel capacity of 97.03 million tons for the whole of 2017. In the same year, China's Baowu crude steel output was 65.39 million tons, ranking first in China and second in the world. Maanshan Iron and Steel Group produced 19.71 million tons of crude steel in the same period, ranking ninth in China and 16th in the world. If the acquisition is true, Baowu Iron and Steel will produce nearly 85 million tons of crude steel, the first step in acquiring Maanshan Steel or Baowu Group to reach the top of the world's largest steel company.

Top Ten Iron and Steel Enterprises in the World (2016)

Ranking

Iron and steel enterprise

Capacity (10,000 tons)

one

ArcelorMittal Luxembourg

two

China Baowu Group China

6381

three

Hegang Group China

five

Posco Korea

4156

six

Shagang Group China

Angang Group China

3319

eight

Japan Iron and Steel Engineering Holdings Japan

3029

Shougang Group China

2680

ten

Tata Steel India

2449

Acquisition feasibility evaluation

1. Nearly halve steel production capacity in the next 10-20 years

On September 20, 2018, the second ministerial meeting of the Global Forum on Steel overcapacity was held in Paris, France. From 2016 to 2017, China resolved steel excess capacity by means of marketization and the rule of law by about 120 million tons. Over the past two years, China has relocated 272000 steel workers, more than the total number of steel jobs in the United States, Japan and the European Union. In 2018, China will continue to cut its crude steel production capacity by 30 million tons. Since 2017, the relationship between supply and demand in China's steel market has improved significantly, steel prices have basically returned to a reasonable range, and the profit level of enterprises has steadily improved.

Chen Derong, general manager of China Baowu and deputy secretary of the party committee, believes that according to the current per capita steel demand in Europe and the United States, China will be able to meet the demand in the future with only 500 million tons of steel. At present, the country's steel production capacity is more than 1.1 billion tons, so there will be 600 million tons of production capacity to be removed in the next 10-20 years.

2. Industrial concentration helps to expand the bargaining space for upstream and downstream industries

Low industrial concentration has also been a constraint on China's steel industry in iron ore pricing negotiations one of the factors. The Chinese government's simple measure of industry concentration is the proportion of the top 10 producers in total crude steel production. In 2016, the Chinese government released the Iron and Steel Industry Adjustment and upgrading Plan (2016-2020) as part of the 13th five-year Plan, including "promoting mergers and acquisitions." The plan clearly reaffirms the goal of reaching a concentration level of 60 per cent by 2020 and 60-70 per cent by 2025. But so far, the industry is about 40% concentrated, far from that goal.

The central government's policy encourages mergers and restructurings in order to create "national and regional leading enterprises." In fact, the integration of China's iron and steel industry and the reform of state-owned enterprises are still the largest unrealized part of the central government's iron and steel industry planning. There are still more than 400 steel companies in China, still the most scattered in the global steel industry.

3. The overall advantage of the enterprise brings greater economic benefits

The expansion of mergers and restructurings will also lead to a substantial increase in profits. Take Shagang and Jianlong, which have a production capacity of 50 million, as an example, in the first half of 2018, Shagang made a profit of 12.4 billion yuan and Jianlong realized 5.167 billion yuan. Specifically, Shagang through its company to become the largest shareholder of Northeast Special Steel, restructuring. Jianlong continuously merged Haixin Iron and Steel and Beiman Special Steel, and Haixin alone made a profit of more than 1 billion yuan in 2017.

In the future, we may establish a steel merger and development fund to promote joint mergers and acquisitions among enterprises and upgrade the industry. Wang Lianzhong said: merger and reorganization among enterprises will effectively solve the problems of insufficient strength, excessive risk, and insufficient management capacity of individual enterprises, and give full play to the overall advantages of enterprises.

Planning objectives related to the Development of Local Iron and Steel Industry-large-scale Development is the General trend

At present, many places have issued planning objectives related to the development of the iron and steel industry. By 2020, iron and steel enterprises in Hebei Province will form a "2310" industrial pattern, including 2 internationally competitive enterprises, 3 local strength enterprises and 10 characteristic steel enterprises. Jiangsu has actively formed a "134th" pattern, and Shanxi plans to reduce the number from 27 to 10. Sichuan strives to build a 10-million-ton backbone iron and steel group with great influence and strong competitiveness, with a total output value of 350 billion yuan.

Merger and reorganization and improving the degree of industrial concentration is the only way for the iron and steel industry to expand the scale development and realize the scale benefit in the future. In particular, the independent living space of small and medium-sized private iron and steel enterprises is reduced, and we must take the road of joint reorganization and scale.

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