China is considering a sweeping overhaul of its steel industry that would consolidate major producers into two giants, with one located in the north and another in the south, according to people familiar with the plan.
Hebei Iron & Steel Group, the nation’s biggest mill by output, and Shougang Group will be combined into Northern China Steel Group, while No. 2 producer, Shanghai Baosteel Group Corp., and Wuhan Iron & Steel Group Corp. will be merged into Southern China Steel Group, said the people, who declined to be identified because the information is confidential. Shares in the listed units of Hebei and Shougang rose on the news.
The state-owned Assets Supervision & Administration Commission didn’t respond to a request for comment on Monday, while a Baosteel Group spokesman declined to comment when reached by Bloomberg. Calls to Hebei, the news department at Shougang and Wuhan Iron & Steel were not answered.
The potential combinations would give Chinese mills the scale to rival global giants such as ArcelorMittal, and enhance government efforts to reduce overcapacity as part of its drive to overhaul an inefficient state sector. Smaller steel companies could later be absorbed into the two new groups once they are established, although nothing has been decided, according to the people familiar with the plan. The plan has yet to win formal approval, they added.
The plan “will help accelerate eliminating excess steel capacities,” Helen Lau, an analyst at Argonaut Securities Asia Ltd., said from Hong Kong. “It will also boost their competitiveness and strengthen their customer bases and leave little room for non-competitive smaller mills.”
Shares in the listed units of Hebei and Shougang rose the most in over two weeks. Hesteel Co. climbed as much as 2.8%, while Beijing Shougang Co. added as much as 3.7%. Baosteel and Wuhan’s listed units are suspended from trading as their parents discuss a restructuring, which analysts have said may presage a union.
Even though China’s steel output has peaked, the domestic market remains saturated, Chen Derong, general manager at Baosteel Group, told a conference in May. As the nation seeks to clear its surplus, exports are running at record levels, sustaining a global glut of the metal and drawing fire from competitors across the globe.
China’s crude steel-producing capacity hit a record 1.2 billion tons at the end of 2015, according to the China Iron & Steel Association. The country is the world’s largest steel producer and accounts for about half of global supply of the alloy that’s used in construction, autos and appliances. The government has pledged to cut as much as 150 million tons of capacity by 2020.