Energy & Resources

Steely determination

Is consolidation in the steel industry picking up speed?

Steely determination

Sparks sure to fly over mergers

Call it a hostile takeover. Last year, violence broke out when privately-owned Beijing Jianlong Heavy Industry Group decided to buy a state-owned competitor located in northeastern Jilin province, Tonghua Iron and Steel Group. Thousands of steelworkers rioted when a Jianlong representative, Chen Guojun, announced that the buyer would be slashing Tonghua’s headcount from 30,000 to just 5,000, reported the Associated Press.

Chen was then hunted down by Tonghua employees. When they found him hiding in a dormitory, they gave him a severe beating, reports the Wall Street Journal. The rioters, having blocked the surrounding roads, then started hurling bricks at police and ambulances, stopping Chen from getting immediate medical attention. He subsequently died from his injuries. Jianlong abandoned the acquisition.

One year on and Tonghua has once again become a takeover target. Last week, state-owned Shougang Group announced that it would pay Rmb2.5 billion ($369 million) for a 78% stake in Tonghua. That seems to suggest that if the private sector is not up to the job, the government will use its own firms to consolidate the industry.

Tonghua’s six million tonnes of annual capacity will push Shougang, the eighth largest domestic steel firm last year, closer to its target of boosting annual capacity to 25 million tonnes in 2010. It will also give it a stronger foothold in the northeast of the country.

This is in line with the government’s plans: it wants the steel industry to be dominated by three large companies with annual output of 50 million tonnes, followed by a number of smaller companies producing around 30 million tonnes a year, reports the Wall Street Journal. By favouring bigger players, Beijing is trying to eliminate the myriad of smaller mills that contribute to overcapacity and energy inefficiency.

Of course, that has been the policy for a while. Industry observers have waited to see if talk will become action. And a string of deals recently suggests that it just might. At the end of May, the government approved the integration of Pangang Steel into Anshan Iron and Steel Group, thereby giving the go-ahead for the creation of the country’s largest mill (see WiC63). And last week, four companies in Tianjin announced that they would merge to create Tianjin Bohai Iron and Steel Group Corp, a company that will have an annual capacity of 21.1 million tonnes, putting it comfortably into the top 10 producers.

The flurry of mergers and acquisitions will have been motivated by strong regulatory pressure. The government has prohibited the creation of new steel projects until 2012, so if a mill wants to expand before then it will most likely have to absorb one of its rivals. There is also continued pressure on the industry’s minor players. New rules were announced last week that should force the closure of steel firms producing less than a million tonnes annually.

Of course, support from Beijing doesn’t necessarily mean that Shougang’s plans will go smoothly. Policymakers are usually a lot keener on consolidation than the job losses that often result. And even if the central government is ready to take its medicine, provincial authorities will need to be convinced.

Then there are the workers themselves. When Jianlong made its own bid last year, it evidently thought it could operate with just a sixth of Tonghua’s pre-takeover headcount. That suggests that Tonghua is somewhat overstaffed, to say the least. But last year’s hostility indicates that workers might not accept their fate without a fight. Someone at Shougang is going to have to be brave enough to visit the steel plant and give them the news again.

No doubt they are drawing straws for that particular task.

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