SteelOrbis Shanghai
As one representative case of the attitude of the Chinese state towards the opening up of the domestic steel industry to foreign investors, Arcelor's bid to invest in Shandong Province-based
Laiwu Steel - which was submitted to the relevant government departments in February 2006 - is still awaiting news of official approval. Though no green light has been forthcoming thus far, neither has any statement of rejection been issued. The case is indicative of the wavering attitude of the Chinese state as regards the issue of throwing the doors of the domestic steel industry wide open to foreign investors.
According to the present state policy in relation to the steel industry,
China in principle forbids any investment deal which will lead to the control of foreign investors over big steel corporations with an annual steel output of five million tons or more. Of course, the listed
Laiwu Steel is one such corporation. If Arcelor's investment deal is approved by the state, it will become the joint biggest shareholder in
Laiwu Steel, together with
Laiwu Steel Group; each holding about 38 percent of shares in
Laiwu Steel.
The Arcelor bid therefore goes against present state policy. Normally, such a case would have been dismissed by the state upon its submission. However, the absence of any response so far demonstrates that the state is still discussing the feasibility of a wider opening up of the domestic steel industry to foreign investors. In fact, looking more closely at the issue, we see that the Chinese state has left itself an escape clause to allow for the eventuality of future large-scale foreign investment. The key words in state policy are “in principle”. In practice, one key reason why many state policies or regulations in
China do not achieve their planned effect is due to the use of the “in principle” terminology. Many exceptions are seen in practice to the official policies and regulations of the state.
In order to gain entry to the Chinese market, some of the world's famous giant steelmakers have tried to invest in Chinese steel mills by means of direct investment or by purchasing shares of the targeted corporations on the stock market. Arcelor is a typical example of such a foreign investor. In recent years, it has tried to invest in some local joint ventures. The most famous of these is the high-grade automobile steel sheet venture in cooperation with
Baosteel and Nippon Steel. However, in all of these steel projects, Arcelor was just a minor shareholder. Its
Laiwu Steel investment bid, however, marks a new and more serious departure.
It has been confirmed that the previous share sales contract between Arcelor and
Laiwu Steel Group has not been changed, but that the deadline has been deferred to March 31, 2007 from December 31, 2006. From September 19 of last year,
Laiwu Steel's stock was withdrawn from public dealing due to the holding of the corporation's general meeting. Due to the positive expectations surrounding
Laiwu Steel and due to the general appreciation of steel companies' shares on the local stock market, the
Laiwu Steel stock price increased sharply by nearly 58 percent when it came back for public
trading on January 18, 2007.
Currently, the expectation is that this case will yet be granted state approval. It is most likely, however, that Arcelor will be allowed only to become the second largest shareholder in
Laiwu Steel, as happened in relation to Mittal's investment in Hualing Steel in 2005. In that case, Hualing Steel's holding corporation, Hualing Steel Group, sold 647.42 shares to Mittal with the result that the latter became the second largest shareholder with 36.67 percent of total shares. Meanwhile, Hualing Steel Group retained 37.67 percent of total shares. Although the difference was just one percent, Mittal's stated ambition of becoming the joint largest shareholder together with Hualing Steel Group finally failed due to the influence of the Chinese state.
The factors in favor of Arcelor's bid are that it will contribute to
Laiwu Steel's technological upgrading and internationalization. It has been confirmed that Arcelor has offered to help
Laiwu Steel to establish a H-section steel research center, providing it with technological support and helping it to sell steel products in the EU market. These offers are welcomed by the state. In any case, the state's decision regarding this case will provide an indication as to its stance on other similar cases in the future.