CRU believes that China is destined for a new phase of steel industry consolidation that could lead to a fundamental change in China's steel industry landscape with ramifications reaching far beyond China.

This CRU Briefing, the first of this series of CRU Briefings by John Johnson (CEO CRU China), will focus on these important developments by explaining why this is happening now and the likelihood of success. In subsequent Briefings, CRU will speculate about what the Chinese steel industry landscape will look like and will examine the implications in China and beyond. Indeed, we believe that the impact of this development may well be underestimated outside of China.

In 2016, the Chinese government published a "Steel Industry Adjustment and Upgrade Plan (2016-2020)", as part of the 13th Five Year Plan, including "the promotion of mergers and acquisitions". However, to-date, except for one mega-merger between Baosteel and Wuhan Iron & Steel, and a few more limited mergers (see table below), the implementation of this plan has been more focused on steel industry closures.

The Chinese government's simple metric for measuring the industry concentration ratio is the proportion of total crude steel produced accounted for by the top ten producers. This plan clearly restates a target of 60% concentration levels to be reached by 2020 and 60-70% by 2025, but to-date, the industry is no-where near this target.

Steel industry ripe for consolidation now?

Planned closures as part of the government's supply-side reform in China have almost run their course during the past two years and profits have risen as a result, but CRU believes that priorities will change soon towards focusing more on M&A. To date profitability has been considered something of a deterrent to M&A. However, the recent levels of profitability have been needed to repair balance sheets of many steel companies by paying down debt which is a necessary pre-cursor for mergers and acquisitions. Hitherto, debt levels have acted as a barrier to M&A but this barrier is being reduced. Moreover, since domestic capacity expansions are effectively banned, mills are left with little choice but to make acquisitions or be acquired.

Furthermore, M&A are being encouraged by central government policy, to create "national and regional champions". In fact, the consolidation of China's steel industry and SOE reform remain the biggest unfulfilled parts of the central government's plan for the steel industry. China still has more than 400 steel companies in existence and remains the most fragmented steel industry in the global steel industry as can be seen in below chart. This is acting as an obstacle to pricing power in the industry, despite Chinese steel mills accounting for 5 of the top 10 steel companies in the world.

Read the full story: https://www.crugroup.com/knowledge-and-insights/insights/2018/the-rise-of-china-s-giant-steel-mills-a-new-era-in-chinese-consolidation/

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About CRU

CRU offers unrivalled business intelligence on the global metals, mining and fertilizer industries through market analysis, price assessments, consultancy and events.

Since our foundation by Robert Perlman in 1969, we have consistently invested in primary research and robust methodologies, and developed expert teams in key locations worldwide, including in hard-to-reach markets such as China.

CRU employs over 260 experts and has more than 10 offices around the world, in Europe, the Americas, China, Asia and Australia – our office in Beijing opened in 2004.

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Source: prnewswire.com

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