Chinese state-owned steel giants Baosteel and Wuhan to merge

Chinese state-owned steel giant Baosteel Iron and Steel today said that it will acquire debt-ridden smaller rival Wuhan Iron and Steel, a move designed to create the world's second-largest steel producer after Luxembourg-based ArcelorMittal SA.

The merger, first announced in June, is part of the Chinese government plan to overhaul its steel industry amid an overcapacity and decline in global steel prices.

In a short statement, Wuhan said Baosteel will issue new shares to its shareholders for the merger. Baoshan and Wuhan have a combined market cap of $16.3 billion, while ArcelorMittal has a market value of $17.2 billion.

Baosteel is China's second-largest steelmaker and the world's fifth largest, while Wuhan is world's eleventh largest by production capacity.

The merger of state-owned companies will create a new company called China Baowu Iron and Steel Group with total assets of $105 billion.

Based on data from 2015, the two steel giants together have an annual production of about 60 million tonnes a year and combined capacity of 60.7 million tonnes.

Baosteel and Wuhan had earlier announced that they would cut capacity - Baosteel by 9.2 million tonnes of production capacity in three years, while Wuhan by 4.42 million tonnes of steel production and 3.19 million tonnes of iron production this year.

The merger is part of a restructuring plan by the Chinese government to reduce excess capacity by 45 million tonnes in 2016 and by 100-150 million tonnes out of a total of 1.2 billion tons by 2020. This is despite projected demand for local consumption of steel in 2016 is only 672 million tonnes.

But German steel federation Stahl alleges that over-capacity in China has actually doubled to 419 million tonnes since 2012, more than twice the entire steel output of the European Union.

China's steel overproduction has hit global steelmakers and has made a huge dent in sales forcing them to close several steel plants across Europe and North America.

With average price of steel in China dropping by more than 32 per cent since the past two years, China has been accused of undercutting the global market with far cheaper prices in order to clear its massive inventory.