FEW industries are in worse shape than China’s steel sector. Years of over-investment and a cooling economy have resulted in vast excess supply. Crude steel-making capacity reached a record level of 1.2 billion tonnes at the end of 2015. China’s steelmakers lost some $10 billion last year, with more than 90% of those losses coming from state-owned firms.
This is the background to the news on September 20th that two state-run steel firms, Baosteel and Wuhan Iron and Steel, are to be joined. The two firms are far from being equals. Wuhan is in financial distress; Baosteel, which brings in three times as much revenue and is better-run to boot, has probably been forced into the deal. The bigger firm’s listed arm will issue shares and absorb Wuhan’s publicly-traded division. The parent companies are also expected to merge. The resulting colossus, which the Chinese media has dubbed Baowu, will have over $100 billion in assets. It will produce 60m tonnes of steel a year, making it second only to Luxembourg’s ArcelorMittal.
The reason to cheer is that this deal might spark a wave of consolidation. There are some 200 steel firms on the mainland. Other countries often accuse China of dumping cheap steel on the global market; such charges cropped up again at the recent G20 summit in Hangzhou. Despite official promises to rationalise the industry, mainland mills produced over 100m tonnes in June; exports shot up by nearly a quarter. The cut-throat competition that results erodes margins for all. Local patronage and subsidies prevent money-losers from ever going bust.
News of this week’s deal sparked renewed interest in another long-talked-of merger, of Bengang Steel Plates and Angang Steel, first mooted over a decade ago. Both firms halted trading of their stocks, denying any plans to merge. There was also speculation that Hebei Iron & Steel Group and Shougang Group, two state-owned firms in northern China, might merge into another national champion.
Even if, as seems likely, a few more big mergers do happen, scepticism is warranted. If officials force strong firms to absorb loss-making mills, instead of shutting them down, they may create bigger, weaker companies. A record of failed policies around steel suggests that the promise of capacity cuts that mergers offer may be hollow. This is especially so in the cases of Baosteel and Wuhan, which have both recently been replacing older mills with new steel-making capacity; it may be hard to turn them in the direction of cutting it.
The government naturally claims that it is serious about slashing excess capacity in industrial sectors, including in steel. But occasionally it acknowledges the obvious. In May a senior Chinese official let slip that there has, in fact, been “no improvement in overcapacity”. The Baowu deal could provide a template for reforming the entire steel sector, but only if it is done properly. As one veteran steelman in China puts it: “the devil is in the details, and now we get to see some of the details.”