china and iron ore, page-35

China steps up steel merger pressure

It is reported that Rizhao Iron and Steel, one of China's largest private sector steel mills, has agreed to merge with a state owned rival as a government led industry consolidation becomes more urgent as the sector is squeezed by the global economic slowdown.

According to the state controlled China Securities Journal Rizhao and state owned Shandong Iron and Steel, located in eastern China's Shandong province, signed a letter of intent recently.

The Chinese government is trying to consolidate the highly fragmented steel industry to put production in the hands of larger, more efficient mills that cause less pollution, while encouraging small, inefficient and highly polluting mills to close.

Analysts said that the recent sharp decline in foreign and domestic demand, especially due to a slowdown in Chinese car sales, could help the government reach this long term goal more quickly after the consolidation's initial slow start.

Mr Du Wei a steel industry analyst at UMetal in Beijing Industry said that consolidation between the two groups had been under discussion for some time. It's quite a representative case of the consolidation trend in the industry at large. The current downturn in the industry has further confirmed that such a trend is inevitable.

Mr Xu Lejiang, chairman of Baosteel, said earlier that this week at a steel conference in Taiwan that Chinese steel production will likely fall to 480 million tonnes this year as slowing demand forces producers to cut output. Previous forecasts had put output at 520 million tonnes to 550 million tonnes. He said that "M&A is an effective way to tackle overcapacity. He added that while less efficient producers may go out of business, Baosteel is planning to raise its annual capacity to 80 million tonnes by 2012 from 28 million tonnes in 2007.

Mr Wang Xiaoqi, head of the Planning and Development Bureau of the state owned Assets Supervision and Administration Commission said recently that "In the next few years, we will try to increase the steel output of major state owned companies to more than 25% of the nation's total."

Ms Du said that the deal between Rizhao and Shandong Iron and Steel represents "an alliance between the strong" and will increase their combined bargaining power. "However, the big concern is whether the aftermath of integration can be smooth, since Rizhao is a private company while Shandong Iron and Steel is a jumbo state owned enterprise."