China’s four state-owned enterprises including three major steel mills including China Baowu Steel Group Co have set up an asset management joint venture expected to provide professional assistance in the country’s steel industrial consolidation and concentration via the means of acquiring, investing, or managing those heavily-indebted steel mills on the brink of bankruptcy, market sources commented.
The joint venture - Huabao Metallurgical Asset Management Co – was formally incorporated on the afternoon of September 13 with Baowu, Anshan Iron & Steel Group, Ma’anshan Iron & Steel Group, and China Orient Asset Management Co as the core investors holding 37.5%, 25%, 12.5%, and 25% stakes respectively, according to a press release by Baowu via its WeChat account.
“China’s steel industrial transformation and evolution will require financial support… and the company is to help with reducing excess capacities in the country’s metallurgical industry and promote the healthy development of the industrial sector,” the press release stated.
The initial capital injection into the joint venture from the four partners are Yuan 2 billion ($291 million).
Market forces to drive the debt restructuring among steel mills
The three steel mill investors in Huabao are headquartered in East, Central, and Northeast China but with their own steelworks across the country, and China Orient Asset Management Co is one of the four existing state-owned professional asset management companies in China, and such a combination “will facilitate the future development of China’s steel industry,” a Shanghai-based source with the knowledge of the matter commented.
Despite reversing into the profitmaking since 2016, most of the Chinese steel mills are still burdened with unhealthy debt-asset ratio with the average being at 67.2% by the end of 2017, which Beijing intends to bring down to below 60%, and the ratio varied among the mills, with some shouldering as low as 30-40% while others as high as 80-90% by the end of last year, as reported.
Banks, either state-owned or privately-owned, are many times clueless on how to deal with poor-performing steel assets even though they are the ultimate creditors, and the lack of know-hows disable them from providing solutions to steel mills when they seek a way-out or look for fresh funds, while Huabao, both with capitals and expertise in the steel market, will come to the rescue when necessary, he added.
Moreover, Huabao, other than the abundant funding to enable it to take the problematic steel mills under its wings, will also be able to offer professional assessment and solutions to those debt-ridden steel mills so as to reinvigorate the mills via the means of steel products optimization, he elaborated.
Li Xinchuang, president of China Metallurgical Industry Planning & Research Institute, agreed, commenting that Huabao will be really helpful in further enhance the concentration and consolidation in China’s steel industry, and “China is shifting towards market forces instead of administrative commands from the governments to achieve this,” he said.
Beijing, in the 2016 version of the steel industry guidelines, spells out its target to raise the top ten steel mills’ contribution to the country’s total steel output to 60% by 2020, which has been progressing steadily but rather slowly, Mysteel noted.
The ratio of the top ten by the first half of 2018 was just at 48.8%, according to the steel mills’ crude steel output data from the China Iron & Steel Association, as against the 36.9% for 2017, 36% as of 2016 or the 34.2% for 2015 but the high ratio for 2016 was mainly because of the merger between Baosteel Group and Wuhan Iron & Steel Group.
Strictly speaking, this has been Baowu’s second invested asset management company with the first being the Four Rivers Investment Management Company that is established jointly by the US-headquartered WL Ross & Co and Baowu and other two partners, and it has successfully revived the heavily-indebted Chongqing Iron & Steel Co, China’s top ship plate producer headquartered in Southwest China’s Chongqing municipality with a total 8.3 million tonnes/year crude steel capacity.
“Compared with Four Rivers, Huabao, being 100% China-owned and with a heavy state-owned colour, is having its own advantage when it comes to dealing with government policy-related issues,” the Shanghai-based source noted.
Baowu, Angang, and Magang, boasting a combined 116 million tonnes/year of crude steel capacity across China, and being the leading steel mills in their respective regions, will be able to identify problematic steel mills fast, investigate the cases thoroughly, and take actions swiftly including even taking over the ailing but rescuable mills themselves, Mysteel understands.
Written by Olivia Zhang, firstname.lastname@example.org
Edited by Hongmei Li, email@example.com