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Baosteel to buy major stake in Ningbo Iron

By Wang Ying (China Daily)
Updated: 2009-03-03 08:06

China's largest steelmaker Baosteel Group inked an accord with Hangzhou Iron & Steel Group Co on Sunday to acquire a majority stake of the latter-controlled Ningbo Iron & Steel Co, a move that heralds the kick-off of a nationwide consolidation in the steel industry, analysts said.

Related readings:  Baosteel abandons Brazil joint venture  Baosteel inks deal with CACC

Baosteel purchased a combined 56.15 percent stake of Ningbo Steel for 2 billion yuan from three private corporations: Tangshan Jianlong Industrial Co Ltd (30.53 percent), Fosun International Ltd (20 percent) and a branch company under New Hope Group (5.62 percent).

During a board meeting after the deal, shareholders agreed on an issue of additional shares. After that, Baosteel's stake remains 56.15 percent, while State-run Hangzhou Steel's stake will be diluted to 34 percent as the second-largest shareholder, and the remaining 9.83-percent share is controlled by the Ningbo government.

No further financial details were released, and calls to Baosteel and Ningbo Iron & Steel went unanswered.

"Ningbo is a site that Baosteel has yearned for a long time," said Zhu Limin, an analyst with Shanghai Securities. According to Zhu, Ningbo Beilun Port, where Ningbo Steel is located, is famous for its deepwater, placid current and convenient transport. After acquiring Ningbo Steel, Baosteel will reduce its shipping cost of raw materials significantly, added Zhu.

Baosteel sought to buy into Ningbo Steel in 2004, but its hope was dashed by Hangzhou Steel. Currently, Ningbo Steel has a maximum annual capacity of 10 million tons.

Hu Hao, an analyst with Centaline Securities, said the deal indicated Baosteel's return to its East China base after its saga in southern China. In June 2008, Baosteel set up Guangdong Iron and Steel Group with its small rivals in Guangdong after merging Guangzhou Iron and Steel Enterprises and Shaoguan Iron and Steel Group. This investment would secure Baosteel's foothold in South China, a strategic move in knitting a national network.

"The Ningbo deal falls into the context of the State call for deeper consolidation in the steelmaking sector," said Hu. "Baosteel has an ambitious plan of producing 80 million tons of steel by 2012, and this deal will expand its output to 40 million tons in 2009," added Hu.

Jiang Qiu, an analyst with Guotai Jun'an Securities, pointed out that after the deal, Baosteel will be able to better serve its Zhejiang clients' demand, since the province used to suffer from a shortage of steel supply. As for Ningbo Iron & Steel, with the injection of technology and capital from Baosteel, it will have an upgrade of production and management, said Jiang.

Analysts expect further merger and acquisition cases soon. "In the market slump, many small- and medium-sized steel mills will look for financial shelter in the form of merger and acquisition, giving top steelmakers like Baosteel a low-cost intervention," Jiang added.