Tag Archives: Baosteel

Baosteel Cuts Prices

Baoshan Iron & Steel is cutting prices for its main steel products for the first time in nine months — a clear sign of falling demand in a sputtering economy. As China’s largest listed steelmaker where Baosteel leads others in the industry will follow. The cuts are of the order of 5% depending on the product line and in line with discounts customers have already been getting in recent months. With demand weak and output at record levels the supply glut is worsening.

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The Battle For China’s Steel

The Economic Observer says the investigation into the leaking of China’s negotiating position at the iron-ore price negotiations earlier this year that has resulted in the detention without charge of four Rio Tinto employers has widened to include Baosteel, the largest steel company. (China Daily has reported that all 16 of the leading steel mills are implicated, though this remains unconfirmed.)

The Economic Observer also lays out the way the government stepped in to take control of this year’s annual price negotiations, dissatisfied that the individual companies were consistently getting the worse of each year’s deal, with the consequent impact on the economy of higher steel prices. By having the China Iron and Steel Association handle a collective negotiation, the government thought it could hold a tougher line on prices and stop the negotiating tactics leaking out by cutting the steel companies out of the picture. But what the Economic Observer suggests is that it was not price but quota size that mattered most to the larger steel mills. So secret side deals that have always taken place between the mills and the miners continued, and with them the mutually back-scratching relationships necessary to facilitate them. So in what has become a political power battle between government and the state-owned steel mills, officials are cracking down in the only way they know how, hard.

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Steel Cuckoo

A first cuckoo of economic spring? Several steel mills have announced price increases ranging from 5% to 25% for a variety of products, the Asian Wall Street Journal reports.

Baosteel and Anshan Iron & Steel say that they will raise prices for hot-rolled coil steel. Baosteel also said it will increase production at some of its mills. Plans for the state to buy a steel stockpile have been dropped.

There is still plenty of excess capacity in the industry given the overall weakness of demand, and plans are afoot to address both, according to a Bloomberg interview with Li Xinchuang, vice president of the China Metallurgical Industry Planning and Research Institute. But steel is a bellwether because the metal is so widely used from car manufacturing to commercial construction to infrastructure — all the sorts of things that benefit from stimulus packages.

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Vale Backs Down Over Iron Ore Premium

Baosteel Group, the country’s biggest steelmaker, says Cia. Vale Do Rio Doco, the world’s largest iron ore supplier, has dropped its demand for a 12% premium on its exports to China. The global slowdown has led to a slump in demand for Chinese steel at home and abroad — and piles of unused iron ore piling up at Chinese ports. Vale had already raised its annual contract price for 2008 by 70%, and most Chinese steelmakers are now losing money. So Vale’s threat to withhold supplies unless the premium was paid, initiated last July before the dramatic change in market conditions, had little sting (see: “Flat Output Will Help Steelmakers Strike Better Iron Ore Deals“)

The slump is likely to lead to widespread consolidation of the industry. In that regard, this caught this Bystander’s eye: Baosteel’s chairman Xu Lejiang says that his company is looking to promote “intensive cooperation” with Taiwan’s China Steel, Bloomberg reports. The Taiwanese company’s Chang Chi-juch says the two companies are looking to share their acquisitions expertise.

The comments come as Beijing’s top envoy on Taiwan affairs, Chen Yunlin, arrived in Taipei with a 60-strong delegation for talks to push for stronger ties across the Straits. He is the most senior official to go to Taiwan since 1949.

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Flat Output Will Help Steelmakers Strike Better Iron Ore Deals

Confirmation of the problems in the steel industry comes from Shan Shanghua, secretary general of the China Iron and Steel Association (here via People’s Daily).

He says production will be flat this year at 500 million tonnes, revising the association’s previous forecast of 5%-10% growth. Nor does he expect output to grow next year. The world wide economic slowdown is to blame (see “Baoshan Steel Will Cut Prices, Again, As Demand Slumps“).

Shan was speaking at a conference in Qingdao that unofficially kicks off the annual price contract between Chinese steelmakers and their iron ore suppliers. As well as negotiating down record prices, the steelmakers want to overhaul the way prices are negotiated to unify the prices of imports from all countries, as Japan’s steelmakers do. The stalling of production growth, which has left 80 million tonnes of iron ore stacked up at Chinese ports, will give China’s steelmakers a stronger hand in those discussions.

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China May Want To Buy Into BHP Billiton

Reports from Australia ahead of that country’s prime minister’s visit to Beijing that China wants to elbow its way into the takeover by BHP Billiton, the world’s largest mining company, of its rival Rio Tinto.

In February, it acquired a 9.3% stake in Rio for $14 billion through state-owned Chinalco. Wanting to secure raw materials for its steel industry, Chinese officials have been concerned that BHP’s $135 billion bid for Rio would lead to the merged group having too much power in negotiating prices. The price of iron ore has jumped fivefold since 2001, while coal prices are more than twice last year’s levels.

Baosteel has repeatedly been touted as a BHP bidder, but it would be a financial stretch even for China’s leading steelmaker. Just a 9% stake in BHP could cost upwards of $20 billion.

A consortium bid, if one is to materialize, seems more likely. And a consequential minority stake is more likely than an outright bid. Offshore investors must gain Australia’s Foreign Investment Review Board approval to buy more than 15% of a local company. Entities judged to be backed by Sovereign Wealth Funds cannot buy any shares without FIRB approval.

There are plenty of other deals for Prime Minister Kevin Rudd to talk about during his visit, too: Sinosteel Corp last month offered A$954 million for iron ore miner Midwest Corp, while China Metallurgical Corp has agreed to pay $300 million to buy a Cape Lambert Iron Ore Ltd project. Shougang, China’s fourth-largest steelmaker, already holds an 8.4% stake in Australasian Resources Ltd, which is developing an iron ore mine in Australia, all of which is making some Australians call for tighter regulation of foreign investment in the country’s natural resources.

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From Steel To Insurance

Baosteel, China’s largest steel maker, is making a measured diversification into financial services in general and insurance in particular. The moves are worth following as a case study in the shaping of a national champion.

This month the company has upped its stake in New China Life, the country’s fourth largest life insurer, to 17.3% from 9.7%, making it the third largest shareholder, reports the People’s Daily. That puts it behind Zurich Insurance (20%, the maximum permitted) and the state insurance protection fund (30.6%), which stepped in last year to bail out the insurance company after financial scandal.

Through its Huabao Investment subsidiary, Baosteel is already the largest shareholder in China Pacific Insurance Co. with a 21.4% stake. It has a small stake in Huatai Property & Casualty, and there are reports from Japan of a joint venture in the offing with Dai-Ichi Mutual Life, Japan’s second largest life company.

Japan’s largest life company, Nippon Life, has had a similar joint venture with Shanghai’s SVA Group since 2003. An earlier proposal for a Baosteel-Nippon Life tie up went nowhere because of Baosteel’s competitive stake in China Pacific, which may get sold if the Dai-Ichi joint venture is approved by regulators as expected. The U.S. private equity firm, Carlyle Group, holds a position in China Pacific, so there is ample scope for deal making.

There are a lot of Japanese firms operating in the Yangtze River Delta while Baosteel is based in Shanghai. The model, though, would appear to be Generali China Life, a joint venture between Italy’s Generali and state-owned energy giant China National Petroleum, that is successfully selling group life insurance policies. Baosteel brings cash flow from its steel-making business and a large customer base for potential group policies should it be tempted to go beyond taking passive investment stakes into more active involvement in the insurance business.

Tempting, too, to see the hand of Beijing at work in the background here, moving a large state-owned firm into an industry that is not only strategically important for China’s economic development, and set to be expanded over the next few years, but that also can play a role as a stabilizing institutional investor in Shanghai’s wild-west stock market, or as a conduit for foreign investment. In the first 11 months this year, Chinese insurers’ investments reached 1.83 trillion yuan ($250 billion), according to the state regulator, China Insurance Regulatory Commission (CIRC).

Baosteel has invested a reported 5.3 billion yuan in financial services firms, even as it works with Beijing to shut down steel mills — only outdated and heavily polluting ones; it is not getting out of the steel business. As well as its insurance investments, it holds stakes in Shanghai Pudong Development Bank, Bank of Communications and Industrial Bank.

Developing Japan put financial firms at the heart of its keiretsu; South Korea, heavy and light manufacturing at the heart of its chaebol. China’s version looks to be being built around giant state owned national champions.


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Steeling For A Takeover Fight III

“The report that Baosteel plans to buy Rio Tinto is untrue,” says Xu Lejiang, chairman of China’s biggest steel maker, quoted in the China Securities Journal. That is the same Xu who earlier was quoted in 21st Century Business Herald that a bid for the U.K.-based natural resources company was “quite likely”.

So take your pick. The motive for such a bid remains unchanged: Chinese steel makers are concerned by the potential pricing power over their raw materials that a potential Rio Tinto-BHP Billiton merger implies. At the same time Baosteel remains too small to mount such bid alone.

Xu’s first comment first sent Baosteel’s share price soaring before his retraction brought it back to earth. But as John Harding writing in the London Times notes, Xu is not behaving seriously. “The Baosteel chairman’s comments have served as a reminder of the potential power of corporate China, but, at the same time, they also undermine his credibility and that of his company.”

Harding’s main point is that the mishandling of a relatively simply matter of talking to the press doesn’t provide any confidence that the company is mature and sophisticated enough to manage an international conglomerate like Rio Tinto.

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Steeling For A Takeover Fight II

The notion of a Chinese consortium bid for Rio Tinto is back in play, with the 21st Century Business Herald, here via AP, quoting Baosteel’s chairman, Xu Lejiang, as saying there was a strong possibility of such a bid.

The case for the country’s steel makers owning a significant supplier of their raw material has been well rehearsed. The new element in the story is that financial backing for what would probably need to be a bid of at least $200 billion would be coordinated by the National Development and Reform Commission, China’s top economic planning agency, rather than China’s new sovereign investment fund which has repeatedly said it is not tying up with the steel makers to make such a bid.

Though Baosteel is China’ largest steel maker, its publicly traded arm has a market capitalization of $35 billion making it too small to launch a bid alone. If it has difficulties recruiting domestic partners, an alternative could be the giant Japanese steel maker Nippon Steel, with which it has a joint venture. Such a cross-border approach could mitigate international concerns about a purely Chinese bid, though it would complicate the deal and subsequent management of the new company should the bid — should it come — be successful.

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