A big Merger on its way as Chinese Steel Giant Baowu Steel to acquire stake in rival Magang Group

Following decades of reckless investment-driven expansion, China's steel mills have been running at overcapacity over past few years thus prompting the government to take measures to cut outdated capacities and further streamline the industry through mergers and acquisitions.

Now, it seems that the country's steel industry is making some progress towards consolidation as the state-owned Baowu Steel is set to take a majority stake in rival local Anhui province government-controlled Magang Group. The official statement for the same was posted on the website of the Shanghai Stock Exchange on Sunday.

Magang Group listed as Maanshan Iron and Steel Co. Ltd have signed a deal to give 51% of its stake to Baowu Steel. However, the deal is further subject to regulatory approval and shall pass anti-monopoly review.

Magang Steel's Official Notification in Shanghai Stock Exchange

The two steel giants come together

Baowu Steel is world's second largest steel manufacturer following Arcelor Mittal. As per the latest data of WSA (World Steel Association) the company produced 65.39 MnT of crude steel in 2017 whereas Maanshan Steel is ranked 16th in the world with steel output of 19.71 MnT.

The two mills are geographically close to each other, with Magang headquartered in Maanshan city in China's eastern Anhui province, about a four-hour drive from Shanghai, where Baowu Group is based.

From the product perspective, the two companies are broadly complementary. Baowu mainly churns out flat steel products, while Magang's output is split between flat and long steel products used in construction.

Baowu Group and Magang Steel have a production capacity of 70 MnT and 19 MnT respectively whereas Arcelor Mittal has a total steel capacity of 114 MnT. Thus, the combined group would be a potential rival to world's largest steel manufacturer Arcelor Mittal but only in tonnage terms. This is because both the companies have a limited presence in the market outside China. In 2018, most of Magang's production was consumed domestically whereas Baowu exported just 3.8 MnT from its Baoshan Iron and Steel division.

The merger fits with Beijing's strategic objective of putting 60% of its national steel capacity in the hands of its top 10 (mostly state) producers by 2020, up from a third presently. In 2015, Baosteel acquired its rival company, Wuhan Iron and Steel, and formed the country's biggest steel company Baowu Group. A lot more mergers are expected over the next couple of years as Beijing seeks to curtail capacity form the current 1.1 billion tons to some 980 million tons by 2020.