On July 23, Baosteel Group and Baotou Steel Group signed a strategic alliance agreement in Huhehaote city - the capital of China's Inner Mongolia Autonomous Region where Baotou Steel is based. This new agreement would appear to give further substance to the long-standing market rumors of an eventual merger between Baosteel and Baotou Steel.
As China's biggest steelmaker, Baosteel has experienced great difficulties in its efforts to combine with local steel mills, and its bid to reach agreement with Baotou Steel was likewise fraught with hardship. Around three years ago, Baosteel approached Baotou Steel with the aim of discussing the possibility of bilateral cooperation or even of a merger. Baosteel's proposals were refused at the time, as happened in Baosteel's approaches to other local steelmakers, because the steel market was very positive and the local government was reluctant to face the loss of local financial revenues.
Currently, Baotou Steel owns four main product lines - for sheets, pipes, heavy rail & section steel, as well as bars. Furthermore, Baotou Steel possesses rich natural resources. The Baiyunebo Mine famous for its rich iron ore and lanthanide is one of the important mines owned by Baotou Steel. Due to its wide product range, its location and resource advantages, Baotou Steel is a promising steelmaker and as such constitutes a considerable pole of attraction for Baosteel.
In fact, after failing a few years ago to reach any deal with Baotou Steel concerning bilateral cooperation or a merger, Baosteel has since purchased Baotou Steel stock on the capital market in significant amounts and is now one of the Inner Mongolia-based producer's top shareholders.
The latest so-called "strategic alliance" agreement can be seen as laying a good foundation for a future merger between Baosteel and Baotou Steel. An important stipulation in the agreement; Baosteel is to help Baotou Steel improve its management and technological standards, and is also to help it to optimize its product structure of 10 million tons and raise the added value of production; namely, Baosteel will soon start to gain in-depth knowledge of Baotou Steel and will participate in the management of the company.
The Chinese government is also happy to see this new departure, for it means progress in line with the government's promotion of M&As between local steelmakers.