The China Securities Regulatory Commission (CSRC) yesterday approved the merger of Tangshan Iron & Steel Co with Handan Iron & Steel and Chengde Xinxin Vanadium & Titanium Co, paving the way for Hebei Iron and Steel Group (Hebei Steel), their parent, to become the country's second largest steelmaker.

The three arms, Handan Iron & Steel Ltd, Tangshan Iron & Steel Co, and Chengde Xinxin Vanadium & Titanium Co, all announced that their shares have been suspended from trading starting Sept 17 and that it would resume only after the regulatory review result is publicized.

As early as December 2008, Hebei Steel unveiled its overall listing scheme, under which Tangshan Iron & Steel would become its only listed arm engaged in the pillar iron and steel business, after absorbing the other two listed arms through a share swap.

After the consolidation, the crude steel production of Tangshan Iron & Steel would touch 21.2 million tons, up 86.4 percent from the current 11.4 million tons, while Hebei Steel will have a total capacity of 330 million tons annually, ranking second in China and the fourth in the world.

Hebei Steel also said it would inject the assets of Xuansteel and Wuyang Steel into the listed Tangshan Iron & Steel one year after the three arms' consolidation.

Xuansteel and Wuyang Steel are two high-quality subsidiaries of Hebei Steel, mainly producing steel plates and long steel products.

In the share swap, each Handan Iron & Steel share, price at 4.10 yuan, can be exchanged for 0.775 Tangshan Iron & Steel share, and each Chengde Xinxin Vanadium & Titanium share, priced at 5.76 yuan, for 1.089 Tangshan Iron & Steel shares, priced at 5.29 yuan.

The new firm will have an aggregate market value of about $4 billion.

The consolidation could bulk up China's bargaining power in negotiations with the three global mining giants, Vale, BHP Billiton and Rio Tinto.

China is the world's largest producer and consumer of steel driven by its manufacturing sector, construction and automobile industries.

But despite the size of the industry, China's steel firms are disadvantaged in annual international iron ore negotiations due its low industry concentration.

The central government has long wanted to consolidate the fragmented sector into a few big players, hoping the top five steel groups will likely account for 45 percent of the country's total capacity next year from 28.6 percent at present.

It had already started the initial moves last year itself with 17 mergers and acquisitions.

"As the consolidation is oriented by provincial governments, rather than led by the market, the merger will create a big steel player but not a strong one," said Fan Haibo, a steel analyst at Xinda Securities. "To some extent, it is hard to evaluate the future performance of Tangshan Iron & Steel."

How the companies will be integrated and run, and whether the new group has the capacity to manage such a large company was still the key question, he said.

(China Daily September 22, 2009)