Fitch Ratings says Wednesday that increasing government-driven M&A activities in China's steel sector will prolong industry rationalisation and delay the targeted improvement in the overall competitiveness and efficiency of the sector.

Although the agency notes that state-managed M&As provide more flexibility and cushion for domestic steel makers to reorganise themselves, Fitch has some doubts about the success of these administrative measures in China's increasingly diversified economy. The agency believes that more substantial market-driven asset consolidation in the Chinese steel industry is required to reinforce an industry-wide rationalisation and to enhance the sector participants' future competitiveness with global peers.

Notwithstanding the fact that the Chinese central government has repeatedly signaled its determination to rationalise the steel sector since 2005, the more important determinant of consolidation activity so far has been the influence of the provincial governments.

At the current stage, most cross-border mergers in China's steel industry are merely strategic tie-ups, aimed at achieving stronger bargaining power for raw material purchasing and product distribution. To date, however, such strategic tie-ups have contributed little towards rationalising the industry structure and reinforcing China's bargaining power in acquiring raw materials overseas.

Although these regional link-ups have apparently alleviated conflicts between the different regional participants, Fitch views that the defensive strategy adopted by most local governments in China may not motivate these companies to integrate their businesses and management, resulting in few consolidation benefits and little improvement in efficiency, consequently prolonging the consolidation process of the Chinese steel industry.

For example, almost one year after the establishment of Anben Iron & Steel Group, the two merging entities are still operated independently; the cooperation between the two groups has focused on unifying research & development ("R&D"), marketing and distribution networks and linking their financial statements, while further cross-shareholding and asset realignments are still to be pursued.

By People's Daily Online