Plenty more where that came from

FEW industries are in worse shape than China’s steel sector. Years of over-investment and a cooling economy have resulted in vast excess supply. Crude steel-making capacity reached a record level of 1.2 billion tonnes at the end of 2015. China’s steelmakers lost some $10 billion last year, with more than 90% of those losses coming from state-owned firms.

This is the background to the news on September 20th that two state-run steel firms, Baosteel and Wuhan Iron and Steel, are to be joined. The two firms are far from being equals. Wuhan is in financial distress; Baosteel, which brings in three times as much revenue and is better-run to boot, has probably been forced into the deal. The bigger firm’s listed arm will issue shares and absorb Wuhan’s publicly-traded division. The parent companies are also expected to merge. The resulting colossus, which the Chinese media has dubbed Baowu, will have over $100 billion in assets. It will produce 60m tonnes of steel a year, making it second only to Luxembourg’s ArcelorMittal.

The reason to cheer is that this deal might spark a wave...Continue reading