China Puts Finishing Touches to Creation of a Steel Behemoth

(Bloomberg) -- China cemented its approval of the world's biggest steel tie-up in a decade by naming top executives of the merging companies to the posts of chairman and president of the new group, pressing on with efforts to restructure mills in the top producer as prices rebound.

Ma Guoqiang, the 52-year-old chairman of Wuhan Iron & Steel Group Corp. since last year, will take the same title at the as-yet-unnamed new entity, according to the microblog of the State-owned Assets Supervision and Administration Commission. Previously, Ma was general manager of Baosteel until 2013. Chen Derong, 55, and president of Shanghai Baosteel Group Corp. since 2014, will continue in that role in the combined company.

China is promoting mergers among its largest producers to combat chronic overcapacity, boost its influence over prices and create fewer, more profitable mills. Baosteel is China's No. 2 mill by output while Wuhan is the sixth largest, and combined, they'd account for 8 percent of the nation's total output. In the global rankings, they would lie behind only Europe's ArcelorMittal SA.

Chairman Ma “may be the only top executive in China with experience in the two companies, so he knows both sides well and they know him,” Kevin Bai, an analyst at CRU Group, said from Beijing. “It's the best choice for the new company in terms of managing the operations and making the merger happen.”

The restructuring of Baosteel and Wuhan was first flagged in June and the move has come together as prices rose and mills' earnings jumped. Sasac on Friday said it had approved the share-swap plan to unite the two firms' listed units, adding that it had approved in principle the broader merger of the parents.

Steel Surges

Benchmark hot-rolled coil prices in China have rallied 53 percent this year as demand improved on the back of government stimulus. Wuhan's listed unit Wuhan Iron & Steel Co. returned to profit in the third quarter, while Baosteel's Baoshan Iron & Steel Co. recorded its best quarter in four years.

The turnaround may, however, prove short-lived as ballooning raw materials costs -- especially for coal -- and slowing demand threaten profits.

“If steel companies are able to continue passing on costs, then at best they might be able to have the same performance again in the fourth quarter,” said Helen Lau, an analyst at Argonaut Securities Asia Ltd. “But there is the risk that given winter time is the slow season for construction, they won't be able to raise prices and they will come under more margin pressure.”

Mills' average margins in China fell in October to the lowest since March, according to data from Bloomberg Intelligence, mostly due to the surge in coking coal prices. The spike in the raw material will significantly increase costs, and Asia's steel market remains enormously oversupplied, Japan's No. 2 mill JFE Holdings Inc. warned on Friday.

Xu Lejiang, 57, will leave his current positions as Baosteel's chairman and the company's Communist Party chief, SASAC said, without announcing any new role for the executive. Wuhan Steel's current president is Zou Jixin. 

Wuhan Steel's shares fell 0.6 percent on Tuesday to close at 3.13 yuan, while Baoshan rose 0.2 percent to 5.61 yuan.

To contact the reporter on this story: Martin Ritchie in Shanghai at mritchie14@bloomberg.net. To contact the editors responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net, Jake Lloyd-Smith, Jason Rogers