16 September 2019

Steel giant totally unexcited about govt’s M&A push

Miao Wei {苗圩}, China’s Minister of Industry and Information Technology, is said to have written a letter recently to Xu Lejiang {徐樂江}, chairman of Shanghai Baosteel Group Corp. (600019.CN), calling on the nation’s top steelmaker to lead the charge for a fresh round of mergers and restructuring moves in the steel sector.

But Xu bluntly turned down Miao’s request, saying that Baosteel “will be another victim of ineffective M&A strategy and the country’s prevailing officialdom and bureaucracy,” according to a media report. Baosteel will never seek any more mergers with other firms unless the State Council directly instructs it to do so, Xu is said to have asserted.

Roping in large enterprises to swallow smaller ailing rivals through administrative orders has been a well-trodden approach to address the country’s deteriorating overcapacity issue.

Initiated by Miao and his ministry, lofty goals have recently been set for the steel sector. Through proactive mergers and restructuring, production capacity of the top ten steelmakers should make up at least 60 percent of that of the entire sector in two years’ time, authorities said.

But as often seen in the past, overly stringent rules and excessive intervention from local and central governments have left players largely unexcited about the call for more M&As.

Xu has a few bitter stories to share.

The giant allied with Handan Steel for a new plant in northern China six years ago. Despite a good start, the joint venture ended abruptly in March 2009 when the Hebei provincial government, defying Baosteel’s strong objections, was steadfast about bringing the province’s steel producers, including Handan, under the umbrella of Hebei Iron and Steel Co. Ltd. (000709.CN). Baosteel was subsequently forced to withdraw its hefty investment, reportedly 6 billion yuan (US$981 million).

Baosteel’s purchase of the private Ningbo Steel in 2009 didn’t end up well either. It ran into some stiff obstacles in transforming the private entity into its subsidiary, as the State-owned Assets Supervision and Administration Commission (SASAC) required strict compliance for all merger cases by SOEs, ranging from remuneration to marketing practices, with those that suited SASAC’s conformist mind. This led to the Ningbo unit losing some of its flexibility in responding to market conditions.

Rather than keep on talking about tax concessions and loan interest subsidies, the government’s M&A push will be more effective if it addresses fundamental issues like red tape, excessive interference and ideological barriers.

Figures from China Iron and Steel Association show the nation’s top ten producers contributed less than 45 percent of the country’s total output in the first seven months of this year, dropping 1.42 percentage points from a year ago.

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