Merger of China steel firms may ease glut

The Chinese steel industry has long been a needle in the side of the world’s top maker of the metal. Perhaps that’s about to change.

China’s second- and sixth-largest steelmakers by output announced that they’ve entered restructuring talks, with analysts speculating it could lead to a merger creating the country’s biggest mill. The discussions highlight China’s efforts to overhaul its inefficient state-run sector and bolster an economy headed for its slowest growth in decades.

It’s a move that’s likely to be welcomed by ArcelorMittal of Luxembourg, the biggest maker of steel, as it has long called for consolidation in the country that produces half the world’s metal. While European and Japanese companies have been forging alliances to restrain supply, China’s fragmented industry has a record of producing more steel than it needs and exporting the surplus at prices other makers can’t match.

“It would be a very important step in the process and create a clear market leader” in China, said Ingo Schachel, a Commerzbank analyst. “Whether it is a start and there is more to come, that’s hard to tell.”

The merger of state-run Shanghai Baosteel Group Corp. and Wuhan Iron & Steel Group Corp. would create a company with the capacity to make more than 70 million metric tons of steel. That would make it second to ArcelorMittal, with 114 million tons.

It may also lead to plant closures as the nation seeks to clear its surplus. Exports are running at record levels, after hitting more than 100 million tons last year, creating a global glut and drawing fire from rivals in Japan, Europe and the U.S.

ArcelorMittal has long argued for more deals among Chinese companies, with billionaire chief executive officer Lakshmi Mittal saying this year the country’s industry was lagging behind other regions. Since Mittal Steel Co. bought Arcelor SA in 2006, in the steel industry’s biggest takeover, the company has shuttered plants to remove excess capacity in its core markets.

That chimes with Chinese government statements. The chair of the National Development and Reform Commission said the nation would cut steel capacity by 45 million tons this year.

It had already pledged to reduce capacity by as much as 150 million tons through 2020.