Year 2004 is a mile stone in
China's steel industry history. Before this year, only 7 cases of mergers & acquisitions (
M&A) and restructurings took place among
China's steel mils and only about RMB 930 million ($116.4 million) was transferred in 2 cases. From 2004, 14 cases occurred and over RMB 15 billion ($1.9 billion) was transferred in 8 cases by the end of February 2006. Now, powerful steelmakers in
China are becoming more aggressive to merge with other companies or to restructure with the aim of expanding and gaining strength. This trend will not change despite many barriers and difficulties lying ahead. The main causes of this trend are listed hereafter:
First of all, Chinese steel mills have an appetite for the advantages of mass production.
Chinese steel mills are widely spread almost in every province and most of them are small-sized companies. In 2005,
China's steel output was 349 million tons. According to rough statistical data, there are 1,200 steel mills in
China. The average output of each mill is only around 290,000 tons. With such a low yield, most mills lack power to negotiate on prices with raw material suppliers and in consequence, they also lack price advantages for their sales.
Secondly, lessening the number of mills contributes to reducing excessive capacity.
In 2005,
China's steel output and capacity are 349 million tons and 400 million tons respectively. The figures are expected to appear as 385 million tons and 450 million tons this year. Currently, being the number 1 producer in the world,
China's annual steel output is more than the sum of the second and third countries' output. However, most steel products are still positioned for middle and low-end markets. Take HR products for an example: 42% are high grade and 58% are middle and low grade. The mills have to merge or restructure comprehensively in order to reduce the capacity in the mentioned 58 percent.
Thirdly, production requires to concentrate on protecting the environment.
Making steel also means polluting the environment. It is urgent for all countries including
China, to make effective use of limited
iron ore resources and to reduce pollution.
China government is seriously caring about these questions and encourages big mills with advanced
production technology to merge low-level ones so as to release environmental pressures.
Lastly, sharp competition for domestic market requires strong companies!
Chinese market is the biggest pie and attracts all steel giants in the world. Mittal, Arcelor, Posco, ThyssenKrupp, and others have entered this market and are making great efforts to gain more shares by wholly or partially taking over local mills. Under these circumstances, Chinese steelmakers are facing unprecedented fierce competition form these rivals. Despite having produced 22.73 million tons in 2005 and ranking no.6 in the world,
China's largest steelmaker
Baosteel still feels pressure due to its limited scale. Therefore it started to buy the shares of other mills in the capital market. Similar to
Baosteel; Wugang, Shougang and other big mills have also taken steps to expand through
M&A and restructuring.