China ditches steel industry consolidation targets in new plan

BEIJING, March 25 Mon Mar 24, 2014 10:43pm EDT

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BEIJING, March 25 (Reuters) - China's policymakers have again promised to make it easier for steel mills to merge and consolidate, but they appear to have ditched a long-standing target to bring 60 percent of the sector under the control of its 10 biggest enterprises by 2015.

A new industry consolidation plan published on the website of the Ministry of Industry and Information Technology (www.miit.gov.cn) late on Monday said China would continue to simplify approval procedures and also make it easier for firms in bloated sectors like steel, cement and aluminium to finance acquisitions.

But the plan did not include the target, last mentioned in official policy documents in January 2013, to put 60 percent of China's total steel production capacity in the hands of its top 10 steel mills by the end of 2015, up from about 40 percent.

The target was part of a state strategy designed to help state-owned steel firms become more competitive by encouraging them to swallow smaller rivals, and led to a series of high-profile mergers in the sector. But the approach has been heavily criticised within the industry, with big firms increasingly reluctant to take on more unprofitable capacity.

Xu Lejiang, the chairman of Baoshan Iron and Steel Group, China's second biggest producer by total capacity, said last year that the policy had created "huge monsters" lumbered with debt and unprofitable investments.

Before the global financial crisis hit in 2008, China's big state-owned steel firms were desperate to expand their market share through relentless capacity increases, with many firms targeting annual production volumes of more than 50 million tonnes.

But the focus on size rather than efficiency encouraged smaller private players, backed by local governments keen to protect valuable sources of jobs and revenues, to expand as quickly as they could to avoid being taken over up by bigger rivals, worsening the supply glut and further eroding sector profit margins.

Deng Qilin, chairman of China's fourth biggest producer, the Wuhan Iron and Steel Group, told Reuters earlier this month that firms like his had ended their obsession with "disorderly" expansion and were focusing on improving competitiveness.

"Expanding further is meaningless - if you are making losses, having more capacity will lead to even more losses," he said.

He Wenbo, chairman of Baosteel's listed unit, told reporters earlier this month that China's 10 biggest steel producers last year accounted for 39.4 percent of total crude steel output. He also said he expected the share of privately-owned steel mills, now at around half, to continue to expand over the next decade.

China has long sought to tackle problems of overcapacity in industries like steel, and has recently focused on improving technological standards and eliminating low-quality capacity. Its last consolidation plan said it would focus more on "establishing and perfecting" market mechanisms.

(Reporting by David Stanway; Editing by Joseph Radford)

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