Unprecedented consolidations within China's fragmented steel sector, the biggest in the world, are in the pipeline following China's new steel industry policy launched last month.

These consolidations will be led by the nation's top steel makers - Shanghai Baoshan Iron and Steel Corp (Baosteel), Anshan Iron and Steel Corp, Wuhan Iron and Steel Corp and Shougang Group, according to Luo Bingsheng, vice-chairman of China Iron and Steel Association.

The Anshan steel firm and Benxi Iron and Steel Corp, both located in northeast China's Liaoning Province, will soon be combined into a larger single entity, Luo said.

"The two steel producers have joined forces in sourcing and sales as the first step towards an equity merger," he said.

Baosteel, China's No 1 steel maker, is considering building a steel plant in Zhanjiang, a port city in southern Guangdong Province, in a joint project with Guangzhou Iron and Steel Corp and Shaoguan Iron and Steel Corp - two local steel companies in Guangdong, according to Luo.

Wuhan Iron and Steel in Central China's Hubei Province is considering collaborating with Liuzhou Iron and Steel Corp in Guangxi Zhuang Autonomous Region to build a plant in Fangchenggang, a port city in Guangxi, he said.

Shougang in Beijing is constructing a steel plant in Caofeidian, a port on the shore of Bohan Bay, with Tangshan Iron and Steel Corp in northern Hebei Province.

"Fragmentation is one of the biggest obstacles against the steel industry's future healthy development, and consolidations as well as mergers and acquisitions (M&As) are badly needed," Luo said.

Currently, there are some 830 steel makers in China with the majority too small to achieve international competitiveness.

Baosteel is China's only steel maker capable of producing over 20 million tons a year, and it only ranks No 6 in the world.

"Large domestic steel companies should and could take their advantages in terms of management, technologies and capital and play a key role in the sector's reshuffling," he said.

China's steel policy aims to cut the number of steel makers in China and enable big players to control more production through M&As.

It expects that China's top 10 steel makers will control more than 50 percent of the nation's total steel output by 2010 and over 70 percent by 2020.

By 2010 there will be two Chinese steel giants with an annual output of more than 30 million tons, and several others with an annual output of over 10 million tons, according to the policy.

The steel policy also bans foreign investors from having controlling stakes in Chinese steel makers.

"Foreign investors' enthusiasm in M&As in China's steel sector will be dampened by the policy," said a Beijing-based official from an Asian steel giant, who asked not to be named.

Arcelor, the world's second biggest steel group, is likely to quit its plan to merge with Laiwu Iron and Steel Co.

The steel policy will mean that it won't be able to have a controlling majority stake in the Shanghai-listed steel maker based in East China's Shandong Province, said sources familiar with the matter.

Mittal, the world's No 1 steel maker, has cut the size of the stake it plans to acquire in Valin Iron and Steel Co - a Shanghai-listed steel company in central China's Hunan Province - to 36.67 percent from 37.17 percent as a result of the policy.

Therefore, it will not to be Valin's biggest shareholder.

However, analysts said M&As between Chinese steel makers pose a series of problems.

The biggest hurdle is that China's steel market is on the up and many domestic steel makers are unwilling to be controlled by others as they enjoy good sales and profits, said Qu Li from China Securities Co.

"Most of the possible M&As in the short term will be big fish eating small fish. Only when there is an overcapacity of major steel products in China will market-driven associations between big players happen," Qu told China Daily.

"Big Chinese steel makers are mainly working on improving their product mix - producing more products short in supply and lowering those with an over supply," she added.

The expected merger between the Anshan and Benxi steel firms, both of which have an annual production capacity of some 10 million tons, is being pushed by the government, she stressed.

(China Daily August 4, 2005)