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The world's No 2 steel producer Arcelor's decision on Sunday to accept a takeover bid from Mittal, the No 1 firm, will increase the need to see more mergers and acquisitions (M&As) in China's fragmented steel sector, analysts said.

 

Mittal's bid for Arcelor, worth 26.9 billion euros (US$33.7 billion), is expected to create a giant with an annual output of more than 100 million tons, controlling 10 percent of global steel production.

 

Li Xinchuang, vice-president of China Metallurgical Industry Planning and Research Institute based in Beijing, said Mittal/Arcelor will speed up penetration into China with improved capabilities to cash in on the world's biggest and fast-growing steel market.

 

"This will put great pressure on domestic steel makers which are no match to Mittal and Arcelor in terms of capital, technology and management," Li told China Daily.

 

"That is a big stimulus for China's steel sector, which contains too many small manufacturers. We should accelerate M&As within our own companies to create big groups and fend off foreign challenges," Li added.

 

The two big steel groups had already established a presence in China by acquiring local steel mills.

 

Last October Mittal acquired a 36.7 percent stake of Valin Steel Tube & Wire Co Ltd in Hunan Province for US$338 million.

 

In February, Arcelor paid US$260 million to buy a 38.4 percent stake in Laiwu Iron and Steel Co Ltd in Shandong Province.

 

Mittal is also reportedly in merger talks with other Chinese steel makers, such as Baotou Iron and Steel Co Ltd, and Baiyi Iron and Steel Co Ltd both based in northern part of China.

 

Tian Shuhua from China Galaxy Securities Co Ltd said domestic steel firms should not be bought by foreigners too much as the steel sector is "a basic and pillar industry" of China's economy.

 

China has taken measures to raise the sector's threshold against foreign investors and speed up M&As between local steel makers.

 

According to a national steel policy set out last July, foreign investors are banned from having a majority stake in domestic steel firms.

 

China plans to form two steel groups with an annual output of more than 30 million tons each by 2010. It also hopes the top 10 domestic steel makers will control more than half of the nation's steel production by then, as well as over 70 percent by 2020.

 

The nation's biggest steel maker, Baoshan Iron and Steel Corp, produced nearly 23 million tons last year, ranking No 6 in the world. The company's Chairman Xie Qihua said it aims to be one of the world's top three steel groups in 2010.

 

Last August, China's No 2 steel firm Anshan Iron and Steel Corp in Liaoning Province got together with Benxi Iron and Steel Corp, also in Liaoning, to create a group with an annual output of over 20 million tons, representing the biggest merger in the sector so far.

 

China has been the world's biggest steelmaking country since 1996. Last year, its crude steel output grew by 25 percent to 349 million tons.

 

Output is forecast to rise by 10 to 15 percent this year.

 

(China Daily June 27, 2006)