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Sub-anchor: Overcapacity in steel sector require consolidation


09-24-2016 05:19 BJT

For more on the merger, we have my colleague Wu Haojun.

Q1: The deal between Baoshan and Wuhan Iron and Steel is said to be just the beginning of a long and complex process to consolidate China's steel industry. Tell us more about that.

A: The steel industry rode on the express train of China's economic development but it seems now that ride is over or at least slowed down. As the economy cools, demand for commodities such as steel is dropping fast. In 2015, more than half of China's steel companies reported total losses of 65 billion yuan or 9.7 billion US dollars.

And ambitious plans have already made to turn that around. China has shut down steel factories with a total capacity of over 90 million tons over the past five years, and it plans to reduce this by an additional 100 million to 150 million tons by 2020. According to data released by the National Development and Reform Commission, as of late July this year, 47% of the annual target had been achieved.

But like you said, the consolidation process will be long and complex. According to a UBS report, the six industries of iron and steel, coal mining, cement making, ship building, aluminum and flat grass have the most excess capacity in China. Combined they account for around 12% of industrial employment. So the road ahead is expected to be a bumpy one.

Q2: You just mentioned some industries slated to shed excess capacity there. How does this figure into the larger picture of SOE reform?

A:  Merger or consolidation will be an integral part of the effort to reform China's big SOEs. China's state-owned enterprises are still dominant, especially in key sectors of the economy such as energy and telecommunications. But they're often found to lack innovation and market competitiveness. And as the economy slows, many are barely getting by.

According to the State-owned Assets Supervision and Administration Commission, total profits for central government SOEs declined by 3% during the first half of the year. And the Ministry of Finance reported that the profits for the entire state sector fell 9.6% during the first 5 months.

As part of the effort to tackle inefficiency within the state sector, mega-mergers are happening on a fast track. China International Travel Service Group Corporation is now a wholly owned subsidiary of the China National Travel Service Group Corporation. The country has seen a mega-merger between its two largest train makers CNR and CSR.

The government has also approved a merger between China Metallurgical Group and China Minmetals Corporation, both of which are Fortune 500 companies. It's also created the world's 4th largest container shipper through the merger of China Ocean Shipping Group and China Shipping Company. So a lot of big moves have already happened and no doubt more are in the making.

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