SHANGHAI (Interfax-China) -- China's steel industry, which despite being the world's largest is extremely fragmented, will undergo unprecedented restructuring over the next three years in order to consolidate 50% of the country's steelmaking capacity into the top-10 players, state media reported Wednesday.
"It is inevitable for China's steel sector to undergo restructuring in order to shrug off its current scattered and fragmented predicament, and WISCO is well positioned to carry out further mergers and acquisitions this year," Deng Qilin, president of Wuhan Iron and Steel (Group) Corp. (WISCO), one of China's largest steel mills, was quoted as saying by state media Xinhua.
Deng said that the drastic 65% increase in this year's annual contracted iron ore benchmark price from Brazilian-based Vale will increase domestic steel mills' production costs and also negatively affect downstream users. The only way out for steel mills will be to carry out further internal cost reduction measures, through product portfolio optimization, technical upgrades, increased value-added products and phasing out old capacity.
Zhang Xiaogang, Chairman of the China Iron and Steel Association (CISA), said that foreign steel mills' expansion projects in China, including ArcelorMittal's recent China Oriental Group acquisition, will also put pressure on China's steel industry to consolidate.
China's top-10 steel mills currently own approximately one-third of the country's total steelmaking capacity, analysts told Interfax.
In order to minimize the negative impact of increased iron ore prices, Li Xiaobo, general manager of Taiyuan Iron and Steel Group, said that in addition to iron ore imports, steel mills should also secure resources through overseas resource acquisitions and strategic investments.
Li said that increased iron ore prices will also encourage domestic iron ore resource development.
Chinese steel mills are still negotiating with Australian iron ore producers. "Australian miners are asking for a freight rate premium, and Chinese mills are not willing to accept this," Zhang said.
A Tangshan Iron and Steel Group import department official, who asked to remain anonymous, told Interfax, "Brazilian-based Vale has already set a 65% benchmark iron ore price increase with various steel mills for this year, and there should be little variance between this and price hikes agreed upon with Australian iron ore-producing counterparts."
An excerpt from our commentary on 22nd February:
"Higher production costs will eat into margins and may lead to some of the smaller/medium sized operators being swallowed up."
(c) Interfax-China 2008. Commentary provided by David Harman. For further information regarding Interfax China Commodities Daily Reports, contact David Harman at email@example.com. Interfax will publish a comprehensive China Grains & Soft Special Report in March 2008, contact David Harman for details.