Two top China steelmakers announce merger to combat glut

China is trying to overhaul its lumbering state sector and especially its steel industry

Two of China's top steelmakers announced plans to merge on Tuesday,creating the world's second-largest manufacturer of the commodity as markets struggle with a glut caused by Chinese overcapacity.

The world's second largest economy is trying to overhaul its lumbering state sector and especially its steel industry, by using mergers and restructuring to cut chronic overproduction and create world-beating mills.

Baosteel Group, China's second-largest steelmaker, will issue new stock to existing shareholders of Wuhan Iron and Steel Group to absorb the other company, the state-owned companies said in separate statements to the Shanghai bourse, where they are listed.

They did not give details.

The two firms rank fifth and 11th respectively in world production capacity.

The merger will form a new firm called China Baowu Iron and Steel Group, China Business News reported on late Monday, adding the state asset watchdog had already okayed the plan and submitted it to the State Council — China's cabinet — for final approval.

The combined production capacity of the two firms reached 60.7 million tonnes last year, data from the World Steel Association showed, which would make the new entity the world's second biggest producer by capacity, behind ArcelorMittal.

Chinese steel demand has slumped as economic growth slows and the global steel industry is assailed by overcapacity. The crisis has seen manufacturers in Asia, Europe and the US suffer huge losses and led to political rows and accusations of dumping.

Shanghai-based Baosteel's net profit plummeted 83 percent to 1.0 billion yuan ($150 million) last year, while Wuhan Steel lost 7.5 billion yuan, compared with a 1.3 billion yuan net profit in 2014.

An analyst said the merger between Baosteel and WISG was merely the beginning of more such moves in China's steel industry.

"Restructuring in China's steel industry is the trend and it's an unstoppable one," Chen Bingkun, an analyst at Minmetals and Jingyi Futures, told AFP.

Restructuring of another two Chinese steel giants both based in northeastern province of Liaoning — Ansteel and Benxi Steel Group — is next on the agenda, Shanghai Securities News reported on Tuesday. It quoted Chi Jingdong, vice secretary general of the China Iron and Steel Association.

Ansteel is the world's seventh biggest mill and Benxi Steel ranks 21st.