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Steel mills struggle to survive a downturn

By Wang Xu (China Daily)
Updated: 2008-11-03 09:27

Reshuffle time

Analysts say a reshuffle is in sight for the steel industry as some small players may soon be forced out of the game and deep-pocketed State-owned companies may gain increased dominance of the sector following consolidation.

"Further consolidation is the most effective way for steel firms to cope with the current difficulty," says Wang Xiaoqi, head of the Planning and Development Bureau under the State-owned Assets Supervision and Administration Commission. "In the next few years, we will try to increase the steel output of major State-owned companies to more than 25 percent of the nation's total."

Wang estimates that China will have one or two steel firms with an annual production capacity of more than 100 million tons and three or four with over 50 million tons in the next few years, most of which will be State-owned. Currently, Baosteel Group has an annual steel production capacity of 30 million tons.

"The downturn offers a great opportunity for merger and acquisitions," says Xu. "For Baosteel, we now have more options and the price could be lower. We are interested in some privately owned mills."

Industry insiders say Baosteel has been studying a possible merger with Jiangsu Shagang Group. Shagang Group, with an annual steel production capacity of 25 million tons, is now the nation's second-largest steel producer. A major steel merger has already taken place this year, with the coming together of Tangshan Iron and Steel Corp and Handan Iron and Steel Corp in June to form Hebei Iron and Steel Group Co.

Baosteel is not the only firm that expects to benefit from the downturn. An anonymous source reveals that Tata Steel, India's largest steelmaker, is also on the hunt.

"Tata Steel is even considering being a minority shareholder," the source says. "The current downturn means there could be pretty good bargains."

According to the source, the government's 51-percent cap on foreign ownership in steel joint ventures has been the main obstacle to Tata Steel's further investment in China.

"It felt that without a controlling stake, it might meet great difficulty in the restructuring process," the source says. "But a recession is an irresistible opportunity for buyers."

A slowdown in the nation's steel industry would also end the six-year-long boom enjoyed by iron ore producers.

In that time iron ore prices almost quadrupled, thanks to surging demand from countries including China. Hoping the global economic slowdown will only dent iron ore demand slightly, the world's three largest global iron ore producers - Brazil's Vale, Australia's Rio Tinto and BHP Billiton - are now considering raising the long-term contract price for iron ore in 2009.

However, the China Iron and Steel Association forecasts global steel production will stop rising in 2009. It also says China's steel production will barely rise in 2008, compared with previous forecasts of growth between 5 to 10 percent. In addition, 10 major domestic steelmakers, including Baosteel and Hebei Iron and Steel Group Co, have said they will need a price cut for 2009.

"If they could bring the ore price down, it would give some relief to the mills," says Lin. "But our concern now is whether we can survive this winter."

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