Baosteel and Wisco consider merging

Two of China’s largest steel producers are holding talks that could lead to a merger in a move likely prompted by direction from China’s government.

Both Baosteel Group and Wuhan Iron and Steel Co. (Wisco), who disclosed their intention to merge in late June 2016, are state-owned enterprises. China’s central government has been stating for several months that it sees mergers within its steel industry as a way to address the twin problems of excess capacity and red ink within the steel sector.

An online article from the Hong Kong-based South China Morning Post (SCMP) says the two steel producers are making “strategic restructuring plans together” that could result in a merger.

The SCMP refers to Baosteel Group as China’s second largest steelmaker. While Wisco is smaller, adding its assets to Baosteel’s “would unseat domestic market leader Hebei Iron and Steel Group” to cause the merged entity to become China’s largest steel producer, pending any capacity cuts.

A merger of the two steelmakers would result in combined annual output of 60.7 million tonnes, according to the SCMP, putting it ahead of Hebei Iron and Steel Group’s 47.7 million tonnes of annual output.

The newly combined company would remain smaller than Luxembourg-based ArcelorMittal, which produced more than 97.1 million tonnes of steel in 2015.

An analysis posted by Bloomberg News 29 June 2016 implies that without government prompting, it is uncertain whether Baosteel, which is profitable and considered to be well managed, would have an interest in Wisco, which lost $1.1 billion in 2015 and which has made a series of unprofitable investments in iron ore mining and production.