A large batch of small and less competitive iron and steel makers in China are now facing the risk of being either regrouped, merged, or even closed as the country aims to turn from the world's largest steel producer to the strongest one.

There are more than 800 iron and steel firms in China. The government aims to step up the regrouping of these enterprises to build several conglomerates each with an annual output capacity of 30 million tons, said Luo Bingsheng, vice chairman and secretary-general of China's Iron and Steel Association.

The goal is to better utilize resources to sharpen the industry's competitiveness in the international market.

In a just concluded forum on the country's iron and steel industry's development and reform in the year 2005, participants believed that now is the right time to regroup the iron and steel makers as the capital market can provide the funds needed in this regard.

Based on the calculation of Zheng Dong, a chief analyst at Guoxin Securities, the market value of China's listed iron and steel firms amounts to 218.88 billion yuan (about 27 billion US dollars), accounting for 7.55 percent of the total A-share market.

The current split share structure reform offers listed iron and steel producers an opportunity to buy less competitive ones at a relatively low cost.

Yang Xiaoming, a researcher with the Jiangnan Securities, said that the industry was now entering a transition period, changing from fast growth to a relatively stable development period.

China's production of iron and steel has overtaken the domestic demand against the backdrop of a tightening macro-control policy aimed at cooling down the overheated economy, Yang said.

The industry is now facing the challenge of an unbalanced development, he noted.

On the one hand, the supply of high-end products, such as electric steel, coated steel and cold-rolled steel, is insufficient, and 40 percent needs to be imported.

On the other hand, wire steel, whorl steel and bars that are widely used in the building industry, are overproduced.

In the first half of this year, the country's steel output rose 25.9 percent year on year, while consumption receded from a 20 percent growth for three consecutive years to the current 15.7 percent, Yang said.

The declining consumption was leading to a drastic drop of iron and steel prices by more than 20 percent since April.

Although the prices stabilized to some extent recently, Yang maintained that the industry was still facing a gloomy future, predicting that the small and less competitive manufacturers would be put into a tight corner.

So it is urgent for them to be regrouped with bigger and stronger ones, Yang noted.

In addition, many international iron and steel producers have invested heavily in the country's industry over the past years.

These multinational corporations have stepped up efforts to expand business and tried to take a bigger share of the industry through investment and capital infiltration, he said.

Only if China's iron and steel producers grow bigger and stronger via merger and acquisitions, can they avoid being taken over by foreign firms, Yang said.

In line with a blueprint drawn by Luo Bingsheng, the merger and acquisitions will be undertaken based on the geographical locations of the producers.

After a new round of merger and acquisitions, Yang said, China is expected to have five iron and steel "aircraft carriers". They are Liaoning-based Anshan Iron and Steel Group (Angang) in northeast China, Hubei-based Wuhan Iron and Steel Group, (Wugang), in central China, Shanghai-based Baosteel, China's largest steel maker in east China, Hebei-based Shougang Corporation in north China, and Sichuan-based Panzhihua Iron and Steel Group in southwest China.

It was reported that the regrouping of Angang, and the Benxi Iron and Steel Company, also in Liaoning, has already started. But there is no official confirmation.

The two companies' combined proven reserves of iron ore resources make up one-fourth of China's total, Beijing-based China Securities Journalsaid.

The merger of the two would be a win-win deal, said the report.

However, the move also faces great obstacles, such as how to deal with the 160,000 employees of the two companies and how to turn over taxes to the state, as Angang is owned by the central government, while Benxi isrun by the Liaoning provincial government.

Meanwhile Shougang, currently based in Beijing and moving to Hebei, is considering regrouping with Hebei's Tangshan Iron and Steel Company.

Wugang has reportedly signed a letter of intent to regroup with the Guangxi-based Liuzhou Iron and Steel Company in south China.

During China's 11th five-year plan period (2006-2010), Wugang's steel output is expected to exceed 26 million tons.

However, Chen Wenling, director of the Comprehensive Planning Department of the State Council's Research Office, said that local governments lack the initiative to conduct the merger and acquisitions, because the iron and steel industry is a big profit-earner for them.

An iron and steel firm with an output of one million tons each year could achieve hundreds of millions of yuan in profits. So local governments don't want their big money-makers to be purchased by and regrouped with firms from other parts of the country, Chen said.

Some economists maintain that it's not a good time for the industry to undertake mergers and acquisitions. It's too expensive at present, they say, adding that only when the production far surpasses the demand and the industry is in a recession, can the acquisition cost be reduced.

Cao Yushu, deputy secretary general of the Iron and Steel Association, believed that there is still a long way to go for China to become a strong iron and steel manufacturer in the world.

Source: Xinhua