M&As to fuel upgrade of steel sector
Mergers and acquisitions will provide the impetus for sustainable transformation and upgrade of the iron and steel industry and leverage on gains from the overcapacity reduction campaigns in the sector that are coming to an end, industry experts said.
According to the National Development and Reform Commission, the nation’s top economic regulator, China has fulfilled the upper overcapacity reduction goals for the 13th Five-Year Plan (2016-20) in the iron and steel sector in advance, and efforts will be continued for further high-quality development.
Policymakers set a target of eliminating 100 to 150 million metric tons of excess capacity in the iron and steel capacity by 2020 in 2016, after the country’s iron and steel sector saw a downtrend.
At the end of the 12th Five-Year Plan (2011-15), the country’s iron and steel capacity amounted to 1.13 billion tons, which severely saturated the market, while the ratio of 10 largest enterprises’ capacity against the overall capacity dropped from 49 percent in 2010 to 34 percent in 2015, according to the State Information Center, an institution directly affiliated to the NDRC.
The overcapacity cuts are also part of the ongoing supply-side structural reform that also includes deleveraging to sustain high quality economic development.
“The overcapacity reduction campaign also focuses on green development through means such as replacing outdated capacity with clean, effective and advanced capacity, and this has led to the establishment of the world’s most strict environmental protection standards,” said Li Xinchuang, president of the China Metallurgical Industry Planning & Research Institute.
“Having passed the stage of massive expansion to meet growing demand, the industry is relatively stable in both production and consumption, which opens a window for capable companies to expand, with deal momentum surging in the next few years.”
Through M&As, leading companies will increase their market share, and reduce excessive competition, benefiting the development of the industry, he said, adding both domestic and foreign experiences have revealed that increasing industry concentration, or the market share of leading companies, is an important step for the iron and steel industry to optimize its structure and further develop.
The current top 10 Chinese iron and steel companies came into existence through M&As, he said.
Xu Xiangchun, information director with iron and steel industry consultancy Mysteel.com, said M&As in China’s iron and steel industry were not as active as expected in the past, mostly because the industry grew too fast, and attracted too much investment for new capacity.
Now, as market supply and demand are rebalancing, investors are becoming more rational, and it is a good time for capable companies to resort to M&As for expansion, Xu said.
Both Li and Xu said there would be more M&As among Stateowned and private companies in the industry, and among companies from different regions and provinces.
Some of these M&As have already taken place.
On Jan 30, creditors of bankrupt State-owned Bohai Steel Group Co Ltd approved a draft restructuring plan, under which Bohai Steel would sell some of its core assets to private steel-maker Delong Holdings Ltd.
In December, Beijing Jianlong Heavy Industry Group Co Ltd’s restructuring plan for bankrupt steel-maker Xilin Iron & Steel Group Co Ltd in Heilongjiang province got approval from Xilin Group’s creditors, making the Beijing-headquartered private conglomerate one of the five largest steel companies in China.
Before that, some provinces, including Hebei, Jiangxi and Shanxi, issued statements favoring M&As among iron and steel firms to reduce the total number of companies in the sector.
Wang Guoqing, research director at Lange Steel Information Research Center, a Beijing-based industry think tank, said a few large companies will account for the bulk of capacity in the iron and steel industry in the long run, and this year will see such trends intensifying.
That is because, being acquired by large companies has increasingly become a choice for small companies as it becomes more difficult for them to maintain profitability and meet strict environmental standards under current circumstances, she said.