China’s Baowu Steel Targets 100 MnT Capacity by 2020

Chinese steel giant, Baowu Steel is expected to see its annual steel capacity to reach 100 MnT by the end of next year, Chen Derong, chairman of the steel giant said at the second round of equity financing conference of Baowu’s steel trading e-commerce platform held on 28 Jun’19.

Baowu Steel which is China’s biggest steel manufacturer and has a capacity of 87 MnT plans to achieve this via the acquisition of southwest China’s Chongqing Iron & Steel that has capacity of 10 MnT.

Four Rivers Investment Management, a joint venture led by WL Ross & Co and China BaoWu Steel Group completed a comprehensive restructuring and recapitalization of Chongqing Iron & Steel in early 2018.

On 2 Jun’19, Baowu Steel already announced its decision to acquire to buy a majority stake in smaller domestic rival Magang Steel as part of the state’s wider drive to close outdated capacity and merge the country’s fragmented steel sector — all part of the move to improve efficiencies and control.

The two companies had combined crude steel output last year of 90 MnT surpassing total U.S. steel output of 86.6 MnT. The combined group is only slightly behind the world’s No. 1 steelmaker, ArcelorMittal, which produced 92.5 million tons of crude steel in 2018. Now with Chonqqing Steel’s acquisition, Baowu’s capacity will exceed ArcelorMittal’s in the not-too-distant future.

Beijing is actively encouraging steel giants to absorb smaller rivals, as its plan is for the top 10 producers to account for some 60% of steel production (up from 35% now). In the process, Beijing can exert better control over the industry than it has managed in the past. Baowu itself is the product of an earlier merger between Baosteel Iron & Steel and Wuhan Iron & Steel Corporation in 2016.

The Chinese steel market is facing slowing demand and margins are weak. According to market experts, China is promoting consolidation in its steel sector as the fragmented steel industry is less disciplined and more likely to seek local state support to maintain employment (while simultaneously dumping excess production on the world market).
Consolidation improves the chances of a managed rationalization of facilities and output. It’s not guaranteed, of course, but it’s more accountable, with politically appointed and controlled management in place — prospects are improved where policy directives have failed in the past.