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Analysis: China's steel industry consolidation gathers pace, to aid output and emission cuts

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Analysis: China's steel industry consolidation gathers pace, to aid output and emission cuts

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Top 5 steelmakers eye grabbing 40% share in production

Fear of rising carbon costs, low margins to boost consolidation

  • Autor/a
  • Staff
  • Editor/a
  • Debiprasad Nayak
  • Materia prima
  • Carbón Metales

China's steel industry consolidation has been showing signs of acceleration in recent months, with seven major merger and acquisition related transactions announced just over July-August, bumping up the share of China's top five steelmakers' output in the process.

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China wants its top five steelmakers to account for 40% of the country's total steel output by 2025, as it aims to meet its ambitious decarbonization goals.

The country is vowing to become carbon neutral by 2060, but it wants to hit peak carbon emissions much earlier, by 2030. To achieve these goals, plans have been laid out by several energy-intensive industries. China's steel industry accounts for around 15%-20% of national carbon emissions annually.

The recent merger and acquisition transactions have raised the share of China's top five steelmakers from 26% to 30% of the country's total steel production.

The accelerated consolidation, driven by the leading steelmakers, is already helping the Chinese steel industry meet multiple targets at once, such as cutting steel production, capping iron ore prices and reducing carbon emissions.

Although only some of China's leading steelmakers started capping their production from July, China's steel production still saw a notable drop given the sheer size that major steelmakers control.

Steelmakers have been asked to keep their 2021 output at par with 2020 levels. The output during January-July was 8% higher on the year.

The China Iron & Steel Association estimated the country's daily crude steel output in August to decrease to 2.755 million mt/day, down 10% on the year and 12% lower from June.

As output plunged, Chinese domestic hot rolled coil sales margin rose 256% from $39/mt on July 1 to $139/mt on Sept. 6, while Platts IODEX 62% Fe dropped 40% from $219/mt to $132/mt over the same period.

Exceeding 40% target

The Chinese steel industry's ability to cap steel production and maintain decent profit margins is expected to get a shot in the arm in the next three to four years, as China's top five steelmakers' output is expected to meet or even exceed the target of accounting for 40% of the country's total steel output by 2025, according to some steel mill sources.

China's domestic steel demand has almost plateaued amid slowing economic growth, while the efforts to reduce carbon emissions will keep pushing steelmakers' environmental protection costs up, the sources said.

Baosteel, part of the world's largest steelmaker Baowu Group, on Aug. 30 said the current carbon price in China of around Yuan 40/mt ($6.2/mt) could lead to a rise in the Chinese HRC production cost by around 3%.

However, if China carbon prices increase to levels in Europe at roughly Eur60/mt ($71/mt) and carbon trading is extensively imposed in the steel industry, producers could see a sharp 40% rise in production costs for HRC, Baosteel said at the time.

To counter shrinking margin risks, China's leading steel mills have been eager to continue with their acquisitions to increase their market share and bolster their margins in an ever-growing competitive market, while small mills facing high carbon compliance costs will have a smaller wiggle room.

M&A over July-August

Puyang Iron & Steel absorbed Xingtai Iron & Steel in July and Hongrong Iron & Steel in August, all based in the Hebei province, according to latest company announcements. Puyang's crude steel capacity has now risen to over 10 million mt/year.

After this move, China currently has 24 steel companies that have crude steel production capacity exceeding 10 million mt/year.

Meanwhile, Jiangsu-headquartered Shagang purchased two steelmakers — Huixin Special Steel and Huacheng Bosheng Steel in Henan province — in August with a combined crude steel capacity of more than 2.5 million mt/year. Shagang's crude steel capacity is estimated to rise to over 44 million mt/year, according to S&P Global Platts calculations based on output data.

Also, in August, Anshan Iron & Steel became the second-largest steelmaker in China and the third largest globally after absorbing Benxi Iron & Steel. With the acquisition, Anshan boosted its crude steel capacity to over 55 million mt/year.

Baowu Group made a move in July to acquire Shandong Iron & Steel, which will boost Baowu's annual production from 115 million mt/year to around 146 million mt/year.

Putting Baowu's behemoth steel-production capabilities into perspective, Baowu's annual production after Shandong acquisition will be far higher than the world's second-largest steel producing country India.

Another China steel major, Fangda Steel Group, has been in talks to acquire Henan province's Anyang Iron & Steel, which, if successfully realized, will raise Fangda's crude steel output from 19.6 million mt/year to 30.8 million mt/year.

China's top five steelmakers
Annual crude steel output
Target output by 2025
Baowu Group (including Shandong Iron & Steel)
Anshan Iron & Steel (including Benxi Iron & Steel)
Shagang Group (including Huixin Special Steel and Huacheng Bosheng Steel in Henan)
Hebei Iron & Steel
Jianlong Group
Top five steelmakers' share (%) in China's total steel output in 2020
Annual crude steel output shows data from 2020
Output in million mt per year
Source: Worldsteel Association, S&P Global Platts