By Stuart Burns
The planned merger of Chinese behemoth Baowu Steel Group with a smaller rival is painted in rather dramatic terms, as if it is to be something that is feared.
In practice, we should see this as a positive move.
The Financial Times reported this week that Baowu Steel Group is to buy a majority stake in smaller domestic rival Magang Steel as part of the state's wider drive to close outdated capacity and merge the country's fragmented steel sector - all part of the move to improve efficiencies and control.
The two companies had combined crude steel output last year of 87 million metric tons, the Financial Times reports, surpassing total U.S. steel output of 86.6 million tons. The combined group is only slightly behind the world's No. 1 steelmaker, ArcelorMittal (MT), which produced 92.5 million tons of crude steel in 2018.
Capacity of the merged group would be in the region of 90 million tons, making it likely that further acquisitions will see Baowu exceed ArcelorMittal at some stage in the not-too-distant future.
Beijing is actively encouraging state champions to absorb smaller rivals, as its plan is for the top 10 producers to account for some 60% of steel production (up from 35% now). In the process, Beijing can exert better control over the industry than it has managed in the past. Baowu itself is the product of an earlier merger between Baosteel Iron & Steel and Wuhan Iron & Steel Corporation in 2016.
Baowu has a production target of 100 million tons by 2021. With standing capacity in the Chinese market said to be some 928 million tons while output was only 828 million tons last year, there is room for Baowu to achieve its target through acquisition of underperforming rivals.
The Chinese steel market is facing slowing demand and margins are weak - down 46% at Baosteel Iron & Steel, the Financial Times states - and widely reported to have already surpassed peak steel output.
The path from here on out will be based on consolidation, rationalization and better environmental controls - all of which would be good for the wider global community. A fragmented steel industry is less disciplined and more likely to seek local state support to maintain employment (while simultaneously dumping excess production on the world market).
Consolidation improves the chances of a managed rationalization of facilities and output. It's not guaranteed, of course, but it's more accountable, with politically appointed and controlled management in place - prospects are improved where policy directives have failed in the past.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.