China firms merge to become top steel producer

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31 Dec 2008

China's three leading steel mills agreed on Tuesday to merge into one entity via share swaps which will create the country's largest listed steelmaker and further speed industry consolidation. China, the world's largest producer and consumer of steel, is urging its steelmakers to combine forces to increase global competitiveness and improve outmoded facilities, which will help cut pollution and energy consumption. Beijing has also been pushing consolidation in the sector to cushion the impact from depressed demand as China's once roaring economy slows.
Tangshan Iron and Steel Co, the listed unit of China's third-largest steel mill, said on Tuesday that it had agreed to merge with two smaller Chinese steel makers.
All three mills are located in the northern province of Hebei, home to one-fifth of China's steel production capacity.
The three are part of the same business group, the Hebei Iron and Steel Group, and merging them would be a first step towards listing all of the group's major steel assets, Tangshan said.
"The consolidation will definitely boost the efficiency of the merged entity," said CITIC Securities analyst Zhou Xizeng.
"However, the share swap means the parent company will not inject any assets into the newly-consolidated entity."
Asset injections by parent companies are common among larger Chinese firms and typically drive share prices sharply higher.
Shares of the three companies, suspended from trading since August and September, tumbled early on Tuesday as trading resumed, catching up to sharp price falls on China's stock market from the impact of the global financial crisis.
Tangshan Iron and Steel said it would use share swaps to merge with Chengde Xinxin Vanadium and Titanium Co and Handan Iron and Steel Co.
Firms which now belong to the Hebei Iron and Steel Group produced about 31 million tonnes of crude steel in 2007, slightly exceeding the roughly 29 million tonnes produced by the Baosteel Group, which was at that time China's biggest steel maker and the parent company of Baoshan Iron and Steel Co Ltd.
INDUSTRY CONSOLIDATION
Under the merger plan, which needs approval by shareholders and government bodies, one Handan Steel share would be swapped for 0.775 Tangshan shares, while one Chengde Xinxin share would be exchanged for 1.089 Tangshan shares.
The exchange ratios were based on the average prices of the three listed firms over the last 20 trading days, Tangshan Iron and Steel said in a statement to the Shenzhen Stock Exchange.
Shares of Tangshan Iron and Steel would be priced at 5.29 yuan apiece for the swap, while Handan would be priced at 4.10 yuan and Chengde at 5.76 yuan per share.
On Tuesday, Tanshan's shares fell by its 10 percent daily limit to 4.1 yuan, while Handan dropped 6.4 percent and Chengde fell 8.2 percent.
Consolidation in China's steel sector has been gradual but has taken on a new urgency as the global economy slows.
In March, the state-owned parents of Laiwu Steel Corp and Jinan Iron and Steel Co were ordered to merge into Shandong Iron and Steel Group.
In August 2005, Anshan Iron and Steel Group and Benxi Iron and Steel Group, in the country's northeastern province of Liaoning, merged their raw materials purchasing, marketing, foreign trade and financial statements to form Anben Iron and Steel Group.
But the companies have not exchanged equity or cash and did not merge their steelmaking operations. Anshan is owned by the central government,
"Both cases in Hebei and Shandong were handled by the provincial governments, as all the mills involved in the cases are under local state asset management. Therefore, such consolidations move faster," said analyst Henry Liu at investment bank Macquarie in Shanghai.

Source: Reuters