Beijing, 17 July 2009
"The ongoing financial crisis brings new opportunities for accelerating M&A and restructuring activities of China's iron and steel industry while setting huge obstacles for the development of the industry," says Peter Fung, partner-in-charge of Industrial Markets at KPMG China.
KPMG China and China Metallurgical News recently joined hands to launch a new report, entitled China's Iron and Steel Industry during the downturn.
"China's iron and steel industry must take this opportunity to address the industry's concentration, layout, environment and social responsibility issues to benefit from the development opportunities brought by the RMB 4 trillion stimulus package", remarks Lu Wenyan, editor-in-chief of China Metallurgical News.
On 15 November 2008, the Chinese government announced ten stimulus measures to increase domestic demand and promote economic growth by investing about RMB 4 trillion before the end of 2010. The industries included in the stimulus packages including power, railway, real estate, energy, water conservancy and transportation, are all major consumers of iron and steel. It is expected to drive the demand for iron and steel in China which is forecast to reach 427 million tons in 2009, the consumption is well within the industry's total capacity of more than 500 million tons, according to the report.
"Looking at the current situation, one of the future trends of the industry will be the restructuring of large iron and steel groups, including WISCO, Baosteel and Ansteel, and it will dominate the M&A wave," says David Ko, KPMG China's head for the iron and steel sector. "The joint reorganisation of Chinese and foreign-funded iron and steel enterprises will be one of the biggest highlights since the launch of China's first Development Policies for the Iron and Steel Industry in 2005."
The report argues that a reshuffled iron and steel industry in China will be concentrated on China's north to south coastline: Ansteel's Bayuquan Base in Liaoning, Shougang's Caofeidian Iron & Steel Base in Hebei, Baosteel's Zhanjiang Iron & Steel Base and WISCO's Fangchenggang Iron & Steel Base form a concentrated iron and steel production line. Ko adds, "the government not only promotes M&A in the iron and steel industry but also provides more financial support for M&A. For example, some commercial banks have begun to provide M&A facilities."
The financial crisis has escalated the M&A or restructuring activities in China's iron and steel industry. While the economy suffers, crude steel as calculated from the directly and indirectly exported iron and steel products, amounts to about 23 percent of the steel output. Hence, the radical change in the export situation leads to a significant decline in the demand for iron and steel in China. According to the report, iron and steel exports in January 2009 were 1.91 million tons, down by 29 percent compared with the same period of 2008. Domestic demand has also continued to shrink. The report states that due to the impact of the financial crisis, China's domestic demand for iron and steel declined by about 20 million tons compared with normal consumption, about two-thirds coming from reduced industrial production.
"China's iron and steel industry already entered an initial stage of M&A," says Lu Wenyan. A typical case of reorganisation was the listing of Guangxi Iron & Steel Group in September 2008. It was just part of the M&A wave in China's iron and steel industry. Earlier M&A cases involving at least RMB100 billion also covered Shandong Iron & Steel Group, Hebei Iron & Steel Group and Guangdong Iron & Steel Group. The Iron and Steel Industry Revitalization Scheme requires forming two 30-million-ton and several 10-million-ton, internationally competitive, giant enterprise groups by 2010. According to the report, against the background of heated market competition and more stringent environmental requirements, iron and steel groups have realised that in order to survive maintaining their competitiveness, they have to engage in reorganisation, industrial restructuring and possessing some of the strategic resources.
KPMG's Industrial Markets practice is coordinated formally on an international basis. It has set up a multi-disciplinary team with experience in giving professional advice and support in due diligence. The practice supports Chinese companies seeking to invest overseas and assist multinational companies entering or expanding into the China market. The practice can help businesses achieve tax and operation efficiency as well as internal controls and regulatory compliance in their regional and multinational operations.
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