Chinese news agencies have reported in their dispatches that the Chinese central government will perhaps loosen controls on mergers between foreign steelmakers and local steel enterprises. However, according to internal indications from the
China authorities themselves, the contrary is in fact more likely. The Chinese government not only will not loosen its strict control on external mergers, but will also probably close the door on foreign steel mergers for certain a time in order to protect its domestic steel industry.
Currently, the Chinese steel industry is going through a crisis. Under various pressures, mergers and acquisitions (
M&A) among steelmakers is an inevitable trend and have widely received approval. However, due to complex reasons, it's very hard to achieve the goal of big M&As among local steelmakers by the spontaneous power of the market alone. Meanwhile, big M&As are continuing abroad and Chinese steel enterprises have been targeted by some of the world's steel giants. If there is no big domestic
M&A action and if super steel enterprises are not formed soon, then
China's steel industry will probably be eaten like a cake by foreign steel giants. The Chinese government has considerable worries regarding the future of
China's steel industry. The gravity of the situation became more evident with the publication of an important report during the summer of this year.
In July of 2006, a report regarding M&As in the
China steel industry was submitted to the top leaders of the National Development and Reform Committee (NDRC). The author of this report is Mr. Shi Qi Rong, a respected steel expert of 77 years of age who now acts as a senior consultant for the NDRC. In his report, Mr. Shi carefully analyzed the current crisis through thought-provoking examples. He emphasized that, after Mittal's merger with Arcelor, for the purpose of meeting future fierce competition, the major steel countries and steelmakers had reacted quickly and that plans for forming domestic super steel enterprises had been put into practice in the
CIS,
Japan, South
Korea,
Brazil, etc. However, Mr. Shi also pointed out that no substantial big
M&A had occurred in
China. The so-called combinations of Bengang Steel &
Angang Steel and Jinan Steel & Laiyang Steel are just skin-deep. If such a situation can't be changed thoroughly, both big and medium or small sized steel enterprises will inevitably be in danger. His major suggestion is to form a big steelmaker with output of over 100 million tons and several other steelmakers with over 50 million tons of output. Mr. Shi recommends that this be carried out by means of
M&A under supervision of the central government as soon as possible. At present, this report is circulating widely in
China.
As regarding the issue of big M&As in the Chinese steel industry, there has also been another suggestion. This is to form only one big steelmaker who incorporates all steel mills in
China. In this eventuality, the result would be the largest super steelmaker in the world. Of course, this suggestion is very complex and not realistic.
Actually, attitudes vary towards M&As in the steel industry at the current time. Big enterprises want to merge with other mills to become stronger; medium and small sized enterprises want to develop by themselves and so become bigger in the future, while others seek mergers with local big mills. According to preliminary analysis, currently most medium and small sized enterprises want mergers, not with local big mills but with foreign mills. The reason is that it's easy for the owners to collect instant money from foreign steelmakers when their mills are sold while it's hard or even impossible for them to do so when the buyers are local mills. The deeper reason is that many mills have heavy state investment, and local governments can't benefit from M&As between local enterprises owned by the state.
The latest indications show that the Chinese government is seeking to accelerate the
M&A process between local mills through administrative means, with detailed measures currently being drafted. With the purpose of setting aside enough time for domestic M&As, more strict measures will be issued to restrict foreign mergers for a certain period. Some big local steelmakers have even been forbidden by the government from involvement in any foreign mergers.