Chinese Steelmakers Plan Merger
Add comment December 30th, 2008
BEIJING — Consolidation in China’s battered steel industry took a step forward Tuesday with the planned merger of three major producers to create one of the country’s biggest steelmakers by output.
Tangshan Iron, Chengde Xinxin and Handan Iron said the merger will increase their market share and cut overall raw-material and research costs.
Shenzhen-listed Tangshan Iron & Steel Co. said it plans to merge with Chengde Xinxin Vanadium & Titanium Co. and Handan Iron & Steel Co., both of which are listed in Shanghai, through share swaps.
The merger of the three companies, which share the same parent company, fits with the government’s push to make its steelmakers more efficient, as well as to reduce pollution and energy consumption.
In recent years, China bulked up steel production to feed its booming housing market and to supply factories that were pumping out exports; the country is the world’s largest producer and consumer of steel. Now, amid the global financial crisis and the downturn in demand, the government is encouraging consolidation among China’s more than 1,000 steelmakers to deal with excess capacity. In November, Chinese crude steel output fell 12.4% from a year earlier, to 35.2 million metric tons. That production was 18% below October’s level.
The merger comes after Tangshan Iron and Chengde Xinxin’s parent company, Tangshan Iron & Steel Group, merged with Handan Iron’s parent firm, Handan Iron & Steel Group, in June to form Hebei Iron & Steel Group.
After their merger, Tangshan Iron will become the sole operating company of Hebei Iron’s major steel assets and will change its name. The company didn’t say what the new name would be or whether the merged entity’s listing would be on the Shenzhen Stock Exchange.
The merger of the three listed companies will increase Hebei Iron’s market share and cut overall raw material and research costs, the companies said. But they also warned low steel prices and slower economic growth may affect profitability.
Earlier this week, the official Xinhua news agency reported that Hebei Iron is raising its production target for 2009. The move shows Hebei’s “confidence in next year’s steel market,” it said.
In 2009, Hebei intends to produce 38 million metric tons of iron, 41 million tons of steel and 39.1 million tons of rolled steel; up from this year’s 30.1 million tons of iron, 33 million tons of steel and 30 million tons of rolled steel, Xinhua said.
In 2007, Tangshan Iron, Chengde Xinxin and Handan Iron produced about 21 million metric tons of steel products in total, compared with the 22.6 million tons produced by Baoshan Iron & Steel Co., China’s largest listed steel producer by output.
Under the share-swap proposal, Tangshan Iron will exchange 0.775 share for one share of Handan Iron, and 1.089 shares for one share of Chengde Xinxin.
The three companies’ shares fell on their trading resumption Tuesday, after being suspended since Sept. 5, partly because of the stock market’s decline in the past four months and also because of uncertainties surrounding the merger, analysts said.
Tangshan Iron’s shares dropped by the 10% daily limit to 4.10 yuan (60 U.S. cents). Handan Iron ended 8.8% lower at 3.52 yuan, and Chengde Xinxin closed down 10% at 4.95 yuan.
For Handan Iron and Chengde Xinxin’s shareholders who don’t agree with the share-swap proposal, Hebei Iron said it will offer them 4.10 yuan per Handan Iron share, and 5.76 yuan per Chengde Xinxin share.
Hebei Iron said it will buy back shares at an “appropriate price” from Tangshan Iron’s shareholders who don’t agree with the plan, but it didn’t give a figure.
Zhao Xiange, chief steel analyst at China Everbright Securities Co., said uncertainties about the merger weighed on the share prices, as the deal still requires the approval of the three companies’ shareholders, the state-owned assets regulator and the securities regulator.
Zhou Xizeng, an analyst at Citic Securities Co., also said Hebei Iron didn’t provide an asset-injection plan for the merged entity, which “remains a key question for investors.”
Separately, Liuzhou Iron & Steel Group said Tuesday it became a unit of Wuhan Iron & Steel Group, after the parties signed a letter of intent to cooperate in 2005. Wuhan Iron & Steel Group is the country’s fourth-largest steel producer by output, while Liuzhou Iron & Steel Group ranks 22nd.
—Juan Chen
Copyright 2008 Dow Jones & Company, Inc. Al
