SOE merger - Minmetals and China Metallurgical

Bloomberg has reported that China Minmetals and China Metallurgical are to merge. China Metallurgical will become a wholly owned subsidiary of Minmetals.

Minmetals is well known in the metals industry and enjoys a relatively good reputation. China Metallurgical is a construction company. Your blogger had a bit to do with them 10 years ago when we were looking for a Chinese company to build potshells.

The topic of SOE mergers has been doing the rounds for almost 12 months. Last week’s announcement illustrates just how slow the process will be. The question that arises from this announcement is, when will it be Chinalco’s turn?

There was a flurry of anticipation when China Power Investment Company (CPIC) was merged with China Nuclear Construction. Some thought that the smelting assets of CPIC might be transferred to Chinalco. That hasn’t happened.

Clearly Chinalco needs some form of white knight. The aluminium business has been losing money for several years, and the listed arm has had to do some fancy footwork to avoid booking too many losses. Last year, Chalco made more money from government grants than it did from aluminium. But the glacial speed that the SOE reform program has been rolling out means that even if Chinalco is next in the queue, it could be some months yet.

In any case, is it really a good reform program when two massive SOE companies are merged into an even bigger behemoth? According to Bloomberg, the combined company had revenues of US$96 billion in 2013, compared with BHP Billiton at US$66 billion for the same period.

I had thought that Minmetals might be a prime candidate for a merger with Chinalco, but that looks less likely now. That also reduces the field of potential merger partners among China’s 120-something SOE companies.

The merger of these two SOE companies doesn’t really tell us much about what might happen to listed entities that might be caught up in these mega-mergers. This is a question some people have asked me - what happens to Chalco if Chinalco is merged or restructure? Minmetals’ listed arm is effectively unchanged in this deal. Minmetals shares rose on the news, while China Metallurgical shares fell.