The latest indications are that Baosteel's planned merger with Inner Mongolia Autonomous Region-based steelmaker Baogang may be realized sometime in 2008. This result is not spectacular but it seems to be sooner than many people's previous expectations.
The latest discussions about steel industry mergers in China took place during the 11th National People's Conference (NPC) and the 11th Chinese People's Political Consultative Conference (CPPCC). Delegates from the steel industry and the relevant government departments participated in wide and in-depth discussions during which they submitted proposals and suggestions regarding the acceleration of merger and restructuring activity between domestic steel enterprises.
Given the recent and widespread cost increases, especially the 65 percent price hike for iron ore, the whole Chinese steel industry is facing serious challenges. The current steel industry structure with its numerous and scattered steelmakers not only threatens the national interest in the world, but also exacerbates the domestic situation regarding natural resources consumption and disorderly competition. The holding of the 11th NPC and 11th CPPCC was viewed as an important opportunity to promote mergers and restructurings among the producers in the Chinese steel industry.
Baosteel's planned merger with Baogang is an interesting example. On July 23, 2007, backed by the Chinese government, Baosteel and Baogang signed a framework agreement for a strategic alliance aimed at enhancing bilateral cooperation in the areas of technology, R&D, management, markets, and so on. Although it was just an agreement in principal lacking full cooperative details, it was widely considered as a clear signal of Baosteel's intent to complete a merger with Baogang.
Subsequently, in late September 2007 and in January 2008, high-ranked local government officials of the Inner Mongolia Autonomous Region and the chairman of Baogang paid respective visits to Baosteel. So far, as a public company, Baogang has achieved its strategic goal of buying top quality assets from its holding company Baogang Group by means of increased issuings of stocks in 2007. This is an indication that the local government is making preparations for Baogang's merger with Baosteel.
Baogang's biggest shareholder is the government. According to the state's targets, Baogang is to achieve steel output of over 10 million metric tons, with both the company's annual turnover and total assets to exceed US$10 billion.
However, any merger will probably be limited only to steelmaking. Apart from steelmaking, Baogang is also part-owner of the famous Bayan Obo iron ore mine. Besides rich iron ore resources, this mine is most famous for its rich and rare earth types and for its other rare metals. The mine's rare earth reserves occupy 90 percent of China's total reserves and five sixths of the world's reserves. For this reason, with the Bayan Obo iron ore mine proving to be extremely profitable, the local government is reluctant to offer it to Baosteel.