China’s Baosteel has announced it has gained approval from the central government to acquire Wuhan Iron and Steel Corporation (WISCO). The company plans to acquire Wuhan Steel through issuing RMB3bn in new shares to the latter.
The new entity will be named China Baowu Steel Group while details of the merger are still being discussed.
The merger of the two major steel producers in China would create one of the largest steel producers in the world. In 2015, the two groups completed an output of about 60m tons in total. However, Baosteel said it will cut 9.2m tons of production capacity in three years while WISCO will cut 4.42m tons of steel production and 3.19m tons of iron production this year.
The move is a response the central government’s supply end reform policy in several sectors, including shipbuilding and coal, to shed capacity.
Tan Haojun, an analyst in the steel industry, said the merger between the groups is very necessary amid the current market conditions.
According to statistics from Sinolink Securities, the new entity will have an iron ore demand of 100m tons per year, which will account for 5% of the global iron ore trade volume.
China’s steel industry is currently in the doldrums, according to a report from Ministry of Industry and Information Technology (MIIT). Steel prices have been dropping for four years in a row, and major steel producers in China registered a total loss of RMB64.6bn in 2015.
Another two steel producers in China, Angang and Benxi Steel are also in talks for a merger.
