Hebei, China's biggest steel making province, is planning an aggressive reshuffle within its fragmented steel sector.

The north China province intends to combine its 202 steel mills into 40 groups through mergers over the next five years, according to sources from the Metallurgical Industry Association of Hebei Province.

Following the reshuffle, the top 10 steel makers are expected to control more than 75 percent of the province's annual output by 2010, up from around 60 percent last year, according to the sources.

Hebei has been the number one steel-making province in China since 2001 and now controls one-fifth of the nation's total production. Sources said the province would produce more than 70 million tons of steel this year, up from 57 million tons last year.

However, most steel makers in Hebei are small; the province's biggest steel company, Tangshan Iron and Steel Corp, only produced 7.66 million tons of steel last year, ranking number six in China. The nation's top steel group, Shanghai Baoshan Iron and Steel Corp, produced 21 million tons in 2004.

Two big conglomerates in Hebei will be created around government-owned Tangshan steel firm in the north and Handan Iron and Steel Corp, the province's number two steel maker, in the south, sources said. Handan Iron and Steel, also controlled by the provincial government, produced 6.8 million tons of steel last year.

The province will speed up consolidation between local privately-owned steel makers, which control more than half of all production, sources said.

Steel companies in Hebei have also started teaming up with counterparts outside the province, as well as overseas investors.

Last month, Tangshan Iron and Steel and the Shougang Group, China's number four steel maker based in Beijing, formed a joint venture to build an 800-ton steel plant on a tiny island in the Bohai Sea. This has an initial investment of 67 billion yuan (US$8.27 billion).

The Tangshan steel firm and Shougang hold a 49 and 51 per cent stake in the venture respectively.

Meanwhile, CITIC Pacific Limited, a Hong Kong-based-and-listed industrial investment group, yesterday announced it would spend 1.48 billion yuan (US$182.7 million) buying a 65 percent stake in Shijiazhuang Iron and Steel Corp, the eighth biggest steel producer in Hebei.

The remaining stake will be held by the provincial government and a local industrial investment firm.

The Shijiazhuang steel firm produced 2.08 million tons of steel and reported 282 million yuan (US$34.8 million) in after-tax profits last year.

The reshuffle of Hebei's steel sector is in line with the central government's efforts to boost consolidation within China's entire steel industry.

According to China's steel industry policy, published in July, the nation plans to create two steel giants, each with annual output exceeding 30 million tons, by 2010 through mergers and acquisitions (M&A) between domestic steel makers.

China, which has been the world's biggest steel maker for 10 years, expects its 10 biggest steel groups will account for more than half of the nation's total steel production by 2010 and over 70 per cent by 2020.

However, there are lots of obstacles facing this rationalization process, according to analysts.

Zhou Xizeng, of Beijing-based CITIC Securities Co Ltd, told China Daily that it would be very difficult to balance the interests of different local governments as many steel makers form the backbone of local economies.

"Lots of steel makers enjoy good sales and profits as China's steel demand is on an upward trend. Therefore, who will be willing to be controlled by someone else?" Zhou said.

Steel sector profits in Hebei surged by 82.8 percent year-on-year to 12.2 billion yuan (US$1.51 billion) in the first eight months of this year, according to local statistics.

In the first three quarters of this year, China's top 68 steel makers made 65.3 billion yuan (US$8.1 billion), up 11.7 percent from a year ago, according to statistics from the China Iron and Steel Association.

China's steel output is anticipated to reach 340 million tons this year, up from 273 million tons last year.

(China Daily November 17, 2005)