M&As embedded in China's Baowu's next 5-year strategy

M&As crucial for China's steel industrial consolidation

"The 100 million t/y is not the destination, but a new starting point for us in the context of the supply-side structural reform in China's steel industry," Chen stated at an online event on September 16, according to a report by China's official media Xinhua News Agency.

In the next five years, Baowu will maintain the fast pace of M&As and restructuring to further enlarge its market share and influence both at home and abroad, and support the country in upgrading the domestic steel sector from the status quo of "being small-sized, scattered and low-end", according to Chen.

Among the many targets, in the next five years, Baowu will consolidate and restructure the steel producers in Northwest China's Xinjiang through its local subsidiary - Bayi Iron & Steel, and as the latest act, Baowu signed an agreement on September 4 with Xinxing Cathay International Group Co, China's leading ductile pipe producer headquartered in Beijing but with steel operations in Xinjiang, to cooperate on the optimization, according to Baowu's releases.

Xinjiang, the rather inland region in China, has all of sudden faced overcapacity in its local steel industry around 2007-2008 with the local authorities' overzealous approval of many steel projects while overlooking the limited potential in local steel consumption, Mysteel Global understands.

Baowu, despite producing about 10 times of Japan's annual steel volume, only accounts for about 10% of China's total steel output, and industrial concentration enhancement, thus, is greatly needed for a self-disciplined and sustainable steel industry, Chen pointed out.

Besides, China, with its steel consumption accounting for 55% of the world's total, needs to have its steel value chain extend to abroad than having 90% circulating inside the country, he added.

The whole supply chain should "go out", including project designing and engineering, overseas steel capacity investment, and processing and distribution especially in the countries along the "Belt & Road Initiative" route, according to Chen.

Baowu has been viewed as the leader among the Chinese steel producers in the past two decades, a booming period for China's steel industry, and the state-owned steel giant has taken its role and social responsibility very seriously, working with the Chinese authorities to enhance the country's steel industrial concentration level, Mysteel Global noted.

Baowu's M&A path in the past five years

All the forward-looking remarks were shared by Chen on the very day when Baowu officially became the actual controller of the 8.4 million t/y Chongqing Iron & Steel Company (Chonggang) in Southwest China's Chongqing as a result of the stake transfer from Four Rivers Equity Investment Management Co, a consortium funded by the Chinese and overseas funds to tide Chonggang over the difficult days on the brink of bankruptcy in 2017, Mysteel Global understood from Chonggang's announcements.

Chonggang, thus, has become the latest Chinese steel mill joining in the big family of Baowu,  marking yet another fulfillment of Baowu along the way of consolidating the domestic steel producers since December 2016 when Baosteel Group completed the significant merger with Wuhan Iron & Steel Group into the new entity of Baowu with a 70 million t/y steel capacity.

Since then, Baowu acquired the 20 million t/y Magang (Group) Holding (Magang) in June 2019,  and then in August this year the 12.9 million t/y Taiyuan Iron & Steel Group Co (TISCO), which is also China's second largest stainless producer with the headquarters in North China's Shanxi province.

The few M&As of state-owned steel mills in China enabled Baowu or the original Baoteel Group to expand its steelmaking capacity to over 110 million t/y in about five years at reasonable costs and through very green means, Mysteel Global noted.

Baowu's M&A path over 2016-2020

Source: Mysteel Global

M&As have been very much in the blood of the then Baosteel Group, and now Baowu, as Baosteel Group, since its incorporation in 1978, has been bringing the domestic steel mills one after another under its wings, among which are Meishan Iron & Steel, Ningbo Iron & Steel, Bayi Iron & Steel, and Shaoguan Iron & Steel, just to name a few.

Written by Olivia Zhang, zhangwd@mysteel.com, and Hongmei Li, li.hongmei@mysteel.com