FEATURE: China Baowu to buy raw materials as a group

China Baowu Steel Group (Baowu Group), the world’s top steelmaker in terms of 2019 output, is further progressing with its internal consolidation with the latest move being to combine its several steel subsidiaries’ raw material procurement and trading under the newly-established Baowu Raw Materials Procurement Service Co Ltd (Baowu Raw Materials), Mysteel Global noted.

According to the release from Chongqing Iron & Steel Company (Chonggang) on March 30, Baowu Raw Materials, as the new entity has been tentatively names, is with a total registered capital of Yuan 500 million ($70.5 million), and Baoshan Iron & Steel Co. (Baoshan Steel), the Shanghai-listed arm of Baowu Group, is its majority shareholder with a 49% stake.

Combining the raw materials procurement with iron ore in particular will considerably strengthen Baowu Group’s pricing power with the major iron ore supplier, enhance its risk management in raw material procurement, reduce its production and operational costs, and maximize the benefit of combining the few steel producers under the wings of Baowu Group, the announcement explained.

“All the existing steel subsidiaries and Chonggang, once it is formally acquired by Baowu, will be moving their iron ore business including procurement and trading to the new entity, out of cost effectiveness and as well as procurement efficiency,” a Beijing-based market analyst that is close to the development shared.

Baowu Group, with an almost 100 million tonnes/year steel capacity, is estimated to source about 200 million tonnes of iron ore in total both for own steelmaking and trading, Mysteel Global understood from the analyst.

Baowu Group and all its invested or controlled core steel subsidiaries including Baoshan Steel, Magang (Group) Holding Co., WISCO Echeng Steel Company, SGIS Songshan Co. and Chonggang, are the shareholders of the Baowu Raw Materials with different stakes.

The new company will be “engaged in imports and exports of merchandise including all major dry bulk raw materials and fuels” and related businesses such as logistics, according to the Chonggang announcement.

The new entity illustrates that Baowu Group’s mergers and acquisitions have advanced to a deeper level into optimizing resources and operations than just to add steel mills into the conglomerate for the sake of the scale in steel capacity, Mysteel Global noted.

Iron ore price volatility in the past year or so has made perfect sense for Baowu Group to procure steelmaking raw materials primarily iron ore via the united frontline, the Beijing analyst agreed.

Mysteel’s SEADEX for 62% Australia iron ore swung between $72.25-127.15/dmt CFR Qingdao for 2019, with the range much wider than the $62.5-79.65/dmt CFR Qingdao in 2018, and 2020 is with greater uncertainties from both demand and supply amid the outbreak of the COVID-19 firstly across China in late January and now almost globally.

The number of confirmed cases totaled 750,890 by the end of March, according to the latest situation report by the World Health Organization, and Mysteel’s SEADEX for 62% Australia iron ore, thus, has been fluctuating between $79.9-96.3/dmt CFR Qingdao in the first quarter of 2020.

Baosteel has triggered its mergers and acquisitions since 2016 when it first took over Wuhan Iron & Steel in Hubei, Central China and created the new entity of combination – China Baowu Group, and as of 2019, Baowu posted a profit at Yuan 34.5 billion and crude steel production at 95.22 million tonnes from its core steelworks in East, Northwest, Central, and South China, thus surpassing ArcelorMittal to become the world’s top steel producer, as reported.

Written by Victoria Zou, zyongjia@mysteel.com and Hongmei Li, li.hongmei@mysteel.com