Two large Chinese chemical companies have arranged to merge into a major conglomerate sometime this year as part of the government's plans to restructure the nation's chemical industry.

The proposed merger between China National Bluestar Corp, which is diversifying into the auto industry, and China Haohua Chemical Industrial Corp, will create a new company to be called the China National Chemical Industry (Group) Corp.

Based in Beijing, the new enterprise will have a registered capital of 5.3 billion yuan (US$640 million), according to sources at Bluestar.

The new company has set the target of increasing its assets to 150 billion yuan (US$18.1 billion) and annual sales to 100 billion yuan (US$12.1 billion), making it one of the world's top 500 multinationals within the next three to five years, sources said.

Another three smaller oil refining and chemical firms will also become part of the new conglomerate, according to a Bluestar official who declined to be named.

Both Bluestar and Haohua have strong government backing and are controlled by the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council, China's cabinet.

Bluestar, which was founded in 1984 by officials from what was known as the Ministry of Chemical Industry at the time, now has total assets of more than 20 billion yuan (US$2.4 billion).

Last year, the company reported 10 billion yuan (US$1.2 billion) in sales.

It has three domestically listed subsidiaries - Bluestar Cleaning, Bluestar New Materials and Southwest Chemical Machinery.

Haohua was set up in 1993 as an affiliate of the former State Petroleum and Chemical Industry Administration.

Its assets totaled 11.3 billion yuan (US$1.4 billion) at the end of last year, while its sales and profits reached 7.37 billion yuan (US$890 million) and 110 million yuan (US$13.3 million) respectively last year.

Haohua also owns a domestically listed firm, the Southwest Chemical Industry Research and Design Institute.

"The two companies overlap in many areas, and such a consolidation is necessary for China's fragmented chemical industry to form internationally competitive groups," said Zhao Xianbing, a chemical analyst with China Securities Co.

There are hundreds of chemical producers across China.

"Based on my observations, the consolidation is also part of the government's efforts to break Sinopec and PetroChina's monopoly in the downstream sector of the petroleum industry," Zhao said.

Sinopec and PetroChina, listed in overseas stock markets, are the nation's top two oil operators.

"Bluestar will continue to exist as an entity under China National Chemical Industry (Group) Corp and the consolidation will not affect our plans in the auto industry," the Bluestar official said.

Bluestar recently showed its strong ambition in the fast-growing auto industry in China.

Earlier this month, the company signed a letter of intent with the Lanzhou municipal government of Northwest China's Gansu Province and British automaker Manganese Bronze Holdings to set up a joint venture to make taxis in China.

The move came after Bluestar in December became the sole bidder for Ssangyong Motors, a troubled automaker from the Republic of Korea (ROK).

Bluestar beat out General Motors, Ford and Shanghai Automotive Industry Corp - one of China's biggest car producers.

Bluestar will buy a 55.4 percent stake of Ssangyong, according to a memorandum of understanding signed in December in Seoul.

If the joint venture and merger plans come true, Bluestar's 20,000 employees in its vehicle repairing and components manufacturing businesses will have "good job opportunities," sources from the company said.

Bluestar's Zhongche has in excess of 200 repair stations in China.

"The auto industry is an opportunity for Bluestar to start a new lucrative business," said Jia Xinguang, chief analyst with the China National Automotive Industry Consulting and Development Corp. "At the same time, there will be many challenges for Bluestar, such as how to make full use of Ssangyong's existing facilities and development capacity, as it is a layman in an industry with increasingly fierce competition."

All of the world's major automakers have teamed up with local partners to set up joint ventures in China.

Many other non-auto companies in China, such as BYD - a listed battery maker based in South China's Guangdong Province - and Bird, a mobile phone producer in East China's Zhejiang Province, are also jumping into the industry with aggressive plans.

Total vehicle output in China surged by 35 percent year-on-year to 4.44 million units last year, including over 2 million passenger cars.

(China Daily February 24, 2004)