CHINA Of all the steel
producers to have emerged from China on the back of the
country's incredible economic boom, Baotou Iron & Steel
(Group) Co. Ltd. is likely to be one of the least familiar.
The company is a mid-ranking mill that until
a couple of years ago was perhaps best known as one of China's
top producers of rail. But Baotou Iron & Steel has grown
rapidly in recent years, adding more than 2 million tonnes of
crude steel output since 2005, although that is nothing
spectacular in the context of the massive growth in Chinese
The relatively obscure mill has attracted the
attention of two of the world's most important steel producers,
Mittal Steel Co. NV, Rotterdam, and Shanghai Baosteel Group
Corp., Shanghai, China, and has come to symbolize some of the
noteworthy changes that are taking place in China.
Before it became the dominant global producer
with its takeover of Luxembourg-based Arcelor SA, Mittal Steel
entered into talks with Baotou Iron & Steel to buy a
49-percent stake in the Chinese company's listed arm. The talks
came to nothing, with Baotou Iron & Steel saying earlier
this year that Mittal Steel had backed away following its
takeover of Arcelor. It's possible that the world's biggest
steelmaker simply had other priorities, but it's equally
possible that the Chinese government's increasing protectionism
towards its steelmakers had a big role to play in the change of
The central government said in 2005 that it
considered steel a strategic industry, and made it clear that
it didn't welcome foreign control of any significant mills. The
government doesn't always get what it wants where the steel
industry is concerned-evidenced by continuing
over-investment-but in terms of foreign investment, Beijing's
word is law.
According to some market participants, Mittal
Steel's retreat helped clear the way for Baosteel to make its
move. China's top steelmaker has long been a favorite of the
central government, and the restrictions on foreign investment
have cleared the way for domestic consolidation.
Rumors of a tie-up between Baosteel and
Baotou Iron & Steel have been floating around for some
time, and strengthened in late April when a government minister
pledged to promote the "unity" of the two companies.
That could have significant implications, not
just for China but also for the shape of the global industry.
Baosteel, which took control of another smaller mill, Bayi Iron
& Steel Co. Ltd., earlier this year, could at a stroke
leapfrog the Japanese and South Korean majors to become the
world's second-biggest producer, behind only Arcelor
China's regional rivals, such as Nippon Steel
Corp. in Japan and Posco Ltd. in Korea, are looking to adapt to
the new world order by enhancing the quality of their output in
order to head off the flood of commodity-grade steel churned
out by Chinese mills. They also are moving to shore up defenses
against possible takeover bids, although interestingly it is
Arcelor Mittal rather than any Chinese producer who is seen as
the biggest threat in Tokyo and Seoul. China's exports, rather
than the hostile intent of its producers, are what keep Asian
steel executives awake at night.
If Chinese mills are focused on domestic
mergers and acquisitions, as seems likely, this could actually
help solve the problem of surging exports. China's top three
producers, Baosteel, Tangshan Iron & Steel Co. Ltd. and
Anshan Iron & Steel Group, accounted for less than 15
percent of total steel output last year. If that proportion can
be raised to 30 percent or more by the end of the decade, then
the amount of control the central government can exercise over
production, and therefore exports, should increase.
It's far from certain that will happen,
however. The fastest-growing segment of the Chinese industry is
the privately owned mills, most of which are smaller producers
that don't answer to Beijing.
Another challenge for Chinese consolidation
is that many of the companies involved are less than
enthusiastic about it. For example, the merger of Anshan Steel
and Benxi Iron & Steel (Group) Co. Ltd. was announced with
great fanfare in August 2005, but two years later the two
companies are still operating as separate entities. On paper,
the joint company, Anben Iron & Steel Group, is China's
largest producer-but internal wrangling, together with the
competing priorities of central and regional government
agencies, are preventing the merger from being completed.
With this in mind, it's unclear whether top
executives at Baotou Iron & Steel will have much say about
whether they want to become an arm of Baosteel. But if Baotou
Iron & Steel does get subsumed into Baosteel, its fate will
illustrate one of the main trends in the recent history of the
Chinese steel industry.
Western steelmakers who initially considered
Chinese growth an investment opportunity have, on the whole,
been rebuffed. The challenge now may be to find ways to adapt
to that growth rather than be part of it.