Foreign investors will be banned from controlling the major steel companies in China although cash from abroad will still be welcome in the sector.

The overcrowded field must also consolidate to meet the challenges ahead, according to the country's first steel industry development blueprint, detailed yesterday.

And if overseas steelmakers want to gain a footing in the domestic steel sector, they must produce at least 10 million tons each year and boast "strong financial strength as well as high credibility," according to the long-awaited new industrial policy published by the nation's top policy planner, the National Development and Reform Commission (NDRC).

Foreign investment into China's steel industry is supposed to come along with the upgrading or relocation of existing steel producers in the country. But the government will not consider new sites for foreign business expansion, the blueprint said.

Liu Tienan, director of the department of industry under the NDRC said yesterday at a press conference in Beijing that foreign cash must "go in line with our long-term guideline to optimize the steel industry" and be conducive to "environmental protection, industrial consolidation and technological upgrading."

China's steel industry, which has seen an annual growth of at least 20 percent in production terms since the beginning of this century, is well-positioned to take advantage of market opportunities and resources, according to Liu.

"China's steel sector is not lacking in market potential, capital or professionals," Liu said. Luo Bingsheng, secretary-general of the China Iron & Steel Association said China's key steel players now have at least 100 billion yuan (US$12 billion) every year to spend on expanding.

And the technology and management of China's top steel makers such as the Shanghai-based Baosteel Group Corp are at the world's cutting-edge level, posing a challenge to the world's steel giants, Luo added.

Also, compared with other major steel-producing countries such as Japan and South Korea, China also benefits from abundant natural resources backing up steel production. "So taking account of all these factors, we should not just blindly suck in foreign investment," NDRC's Liu said.

But despite the new policy stopping foreigners from controlling the nation's steel companies, Liu said China still welcomes overseas investment into the high-return steel sector as long as any deal conforms with the country's long-term development strategy.

Citing an example, the NDRC official said the top planning body has recently approved Mittal, the world's biggest steel group, to buy a 36.67 percent stake in Valin Iron and Steel Co Ltd - a Shanghai-listed steel maker in central China's Hunan Province.

In addition, Liu added, the new foreign investment restriction only concerns the country's large-scale steel producers, "say, the top 10 or top 20 that will steer the growth of the nation's steel production."

For medium or small steel makers that will not affect the overall industry, there will be no capping restrictions in the shareholding structure in joint ventures.

Forging steel conglomerates

Also a focus of the newly-released steel industry blueprint, the country plans to build two large-sized steel groups able to yield 30 million tons of steel annually by 2010, said the new policy.

This will be achieved through mergers or acquisitions (M&As) among existing steel makers across the country, said the steel association's Luo. Several 10-million-ton-per-annum steel conglomerates are also on the government's development agenda within the next five years.

"Low industrial concentration is the most important thing thwarting the sustained growth of China's steel industry," said Luo.

Some 80 million tons, or 20 percent of China's steel output, is produced by small or medium-sized factories which do not meet the country's standard for the steel industry detailed in the new industrial blueprint, said Luo.

"These under-standard producers are to be either phased out of the market as competition intensifies, or merged with large steelmakers," Luo said.

According to the steel association, China had 871 steel and iron smelters at the end of last year, of which only 15 had an annual crude steel output of more than 5 million tons.

To address the fragmented industrial structure indicated in these figures, the country has vowed to make the output of China's top 10 steel makers account for half of the country's total steel production by 2010. The percentage is set to increase to as much as 70 percent by 2020, according to the new industrial policy.

In the process of the upcoming industrial shake-ups, Liu from the NDRC said major M&As will be concentrated in the country's State-owned steel producers, and pertinent supplementary policies should be followed in order to avoid possible hurdles in the transactions.

"The M&As are not a simple coming together," said Liu.

Special attention should be paid to the particular industrial circumstances in China's steel sector, Liu further warned.

For example, when merging two steel companies separately owned by the central and local governments, particular concerns such as taxation distribution and management rearrangement should be taken into consideration, Liu said.

(China Daily July 21, 2005)