Move to spur industry consolidation and further boost supply-side reforms

China Baowu Steel Group, the country's top steel-maker, said on Friday that it would take a controlling stake in Shanxi-based stainless steel giant Taiyuan Iron & Steel (Group) Co, also known as Tisco, in a move that would lead to further consolidation of the steel sector.

Baowu Steel said the deal would help in its goal of producing 100 million metric tons of steel every year. The company said it has reached an agreement with Shanxi State-owned Capital Operation Co Ltd, under which the latter will transfer a 51 percent stake in Tisco, pending approval from the country's top State-asset regulator. Baowu Steel said it will not incur any monetary costs on the deal as the stake transfer is a State-backed restructuring move, it said in a regulatory filing.

Experts believe that the deal is in line with the nation's initiative to promote supply-side reforms, speed up mergers and acquisitions and trim excess capacity for the healthy development of the Chinese steel industry.

"The deal will realize China Baowu's target of expanding its annual capacity to 100 million tons," said Wang Guoqing, director of the Lange Steel Information Center.

China Baowu, a monolith formed from the merger of Shanghai-based Baosteel Group and Wuhan Iron & Steel Group in Central China's Hubei province in December 2016, is the nation's most competitive steel-maker, whose output totaled 95.46 million tons last year.

As a leader in global stainless steel, Tisco is present in iron ore mining, steel production, processing, distribution and trade. Its annual production capacity is 12.94 million tons of steel products.

"The Tisco deal will enrich China Baowu's product line as well as complete the steel giant's nationwide presence," said Zhang Tieshan, operational director of Didisteel, a supply chain company.

Tisco's strength in stainless steel, its production line of ballpoint pen tips among other featured products, will beef up the competitiveness of China Baowu as well as enhance Baowu's business influence in inland areas, said Zhang.

China Baowu has of late been steadily expanding its scale. In September 2019, it acquired Maanshan Iron and Steel Co Ltd (Magang) and in December it decided to become the actual controller of Chongqing Iron& Steel Co Ltd.

The company posted a revenue of 552.2 billion yuan ($79.8 billion) and profit of 34.53 billion yuan in 2019. It also topped the steel sector in terms of business scale and profitability worldwide and was ranked 111th in the latest Fortune Global 500 rankings.

The Lange Steel Information Center expects the transaction to increase the concentration ratio of the steel industry by 1.1 percentage points to 37.7 percent.

"We have seen quite a few mergers and acquisitions in recent years, and as the industrywide restructuring and upgrade continues to roll out, we will see more such deals in the future," said Wang.

According to the target set by the State Council, the country's top 10 steel enterprises will have their combined output account for 60 percent to 70 percent of the total, with the top three (or four) companies' annual capacity reaching 80 million tons each by 2025.

The deal needs further approval from the State-owned Assets Supervision and Administration Commission of the State Council, according to China Baowu.