SASAC merges two steel companies

Wuhan Iron & Steel Group. and Bao Steel have announced they will be merging. Shares in the publicly-listed arms were suspended on Monday.

Bao Steel (Baogang) received the notice from SASAC last Friday to communicate and work closely with Wuhan Iron & Steel (Wugang) to come up with a merge plan. The pattern of strategic restructuring has not been decided.

The merged group will have 61 blast furnace and 62 converter furnaces if the merger goes ahead. It will cover around 80 million tonnes capacity. A merged company will be able to save money on back office costs such as procurement and accounting and HR, but more importantly, a company the size of this merged group would be able to secure more capital. This has always been a key factor for Chinese SOE’s and one which cannot be forgotten amongst the talk of consolidation and Supply Side Reform. SASAC as custodian of the Government’s commercial assets will move according to government and Communist Party policy.

The merged company will become one the most important steel makers in the world.

SASAC is likely in no great hurry to merge too many assets too quickly however. Many of China’s 120+ SOE’s are giant companies already, even by global standards, and the risk is that making companies too big could cause them to fail. Their roles in China’s fabric of society cannot be understated. Their role is to attract capital, especially foreign capital, and they provide jobs for millions of workers. In this context, bottom line profits are probably lower priorities for SASAC.

One has to remember that the chief architect of these moves at SASAC is none other than Xiao Yaqing, who was the man in charge at Chinalco when that company took a strategic play in Rio Tinto. That he starts with merging steel companies is no surprise. The government has said all along that steel and coal would be the focus areas. But as we always say, where steel goes, so does aluminium.