UPDATE 3-Steel merger puts second Chinese firm in top 5
(Recasts, adds comment, background)
By Alfred Cang and Fang Yan
SHANGHAI, Dec 30 (Reuters) - Three Chinese steel mills agreed on Tuesday to merge into the country's biggest listed steelmaker, creating a second Chinese industry champion in the world's top five steel producers.
The three-way merger could bulk up China's bargaining power in negotiations with mining giants Vale (VALE5.SA: Quote, Profile, Research, Stock Buzz), BHP Billiton (BHP.AX: Quote, Profile, Research, Stock Buzz) and Rio Tinto (RIO.L: Quote, Profile, Research, Stock Buzz), which normally set benchmark annual iron ore prices with Baosteel Group, the current leader of China's fragmented steel industry.
China's policymakers have long wanted to crunch the sprawling sector into a few big players, hoping to have 10 steelmakers account for half the country's production instead of 20.
The plan, which aims to improve efficiency and cut pollution as well as adding to China's bargaining power, has gained traction as the economic crisis forces once swaggering steelmakers to look for a way to survive the economic bloodbath.
The new firm will unify Tangshan Iron and Steel Co 000709.SZ, the listed unit of China's third-largest steel mill, with smaller rival Handan Iron and Steel Co (600001.SS: Quote, Profile, Research, Stock Buzz) and ferroalloy producer Chengde Xinxin Vanadium and Titanium Co (600357.SS: Quote, Profile, Research, Stock Buzz), with an aggregate market value of about $4 billion.
"The consolidation will definitely boost the efficiency of the merged entity," said CITIC Securities analyst Zhou Xizeng.
All three are based in the province of Hebei, which encircles Beijing and is home to one-fifth of China's steel production capacity, facts that prompted officials to crack down on the province's polluting heavy industry during the Olympic Games.
The three are all part of the state-owned Hebei Iron and Steel Group, and merging them would be a first step towards listing all of the group's major steel assets, Tangshan said.
BIGGER, QUICKER, BUT STRONGER?
The merger follows the creation of Shandong Iron and Steel Group in March from the state-owned parents of Laiwu Steel Corp (600102.SS: Quote, Profile, Research, Stock Buzz) and Jinan Iron and Steel Co (600022.SS: Quote, Profile, Research, Stock Buzz) and the formation of Anben Iron and Steel Group in northeastern Liaoning province three years ago.
Anben, half of which is owned by the central government, was only a partial merger, with no equity or cash changing hands and no pooling of steelmaking capacity. The Hebei case, as in Shandong, is likely to forge stronger bonds.
"Both cases in Hebei and Shandong were handled by the provincial governments, as all the mills involved in the cases are under local state asset management. Therefore, such consolidations move faster," said analyst Henry Liu at investment bank Macquarie in Shanghai.
The companies will merge via a share swap, which Zhou at CITIC Securities said would inhibit the parent firm from injecting assets into the mix, a common method for fostering a favoured company's growth and often a boon to its share price.
The group's steelmills produced about 31 million tonnes of crude steel in 2007, slightly exceeding the roughly 29 million tonnes produced by Baosteel Group, the parent company of Baoshan Iron and Steel Co Ltd (600019.SS: Quote, Profile, Research, Stock Buzz). This year the Hebei Group will hit 33 million tonnes, rising to 41 million tonnes in 2009, one group constituent, Wuyang Iron & Steel, said on its Web site.
"The merger will create a big steel player but not a strong one, and to some extent it is not good for Tangshan shareholders. Investors are also concerned about how smoothly the companies will integrate," said a steel analyst at Essence Securities.
The three firms' shares have been suspended for months and plunged as trading resumed on Tuesday, catching up with the big price falls in the interim. Tangshan and Chengde Xinxin both fell by their 10 percent daily limit, while Handan lost 9 percent.
Analysts expect the smaller firms to delist and deregister after the merger and said the Hebei Iron and Steel Group could inject its other assets, such as iron ore mines, once the merger, which required shareholder and government approval, is completed. (Editing by Tom Miles and Anthony Barker)
