China's Steel Titan: Unveiling the Merge of Baowu Group

With the rapid development of China's steel industry since the founding of the People's Republic, there have been two milestone moments. One was the establishment of the first phase of Baosteel in 1978. The second was the historic merger of Baosteel and Wuhan Iron and Steel Group in 2016. After a decade of development since the merger, Baowu Group has become a representative of global steel production, symbolizing the strongest productive force of China's steel industry.

Review of the Merger

Baohui Steel Limited has been an agent for Baosteel for over 20 years and has experienced the entire process of the merger of Baosteel and Wuhan Iron and Steel Group. Currently, China's steel industry is in a situation similar to the market environment when Baosteel and Wuhan Iron and Steel merged 10 years ago. It is time for us to recall the merger.

Back then, the steel industry was facing the same kind of troubles we see today: a gloomy market, too much production capacity, and not enough efficiency. The main culprits were two big problems: First, there was a big gap between what was being made and what was needed, both in how much and what kind. This happened because the market was left to do its own thing without any rules to guide it. Second, the usual ways the market corrects itself weren't working, and that was mainly because there weren't any big companies that could steer the whole industry in the right direction.

Market Concentration

Let's talk about the second issue first, that is, the issue of market concentration (not industrial concentration).

After the merger, 70 million tons of Baowu accounted for less than 10% of the national crude steel output, which could not be said to bring an absolute advantage in quantity. However, after the merger, Baowu's market control ability was greatly enhanced. At three levels, the first level is the variety level, the market share of silicon steel is more than 50%, the market share of high magnetic induction oriented silicon steel is 90%, the market share of automotive panels is 50%, the market share of high-strength automotive panels is 70%, and other wear-resistant plates, high-strength plates, and other cold series such as tinplate and color-coated plates are basically the first in market share. In these special steel varieties, Baowu's control is second to none and can even affect the national price.

How to Influence the Spot Market?

The second level is the spot market level. In the past, Baosteel's products had little impact on the spot market because they mainly went directly, and the price was several hundred yuan higher than other companies. Now, Baowu's products can affect the spot market. The first is to vigorously support traders mainly engaged in spot sales such as Baohui Steel Limited, to build spot inventory through traders, adjust market supply and demand, and sell products to small and medium-sized enterprises.

Secondly, the Ouyeel Platform, a subsidiary of Baosteel, has developed from the third-largest steel e-commerce platform to the leading steel e-commerce platform over the years. Baohui Steel Limited's rapid embrace and expansion of the new platform have also greatly enhanced Baowu's influence on the spot market and e-commerce market.

The third level is the regional market. There are three major regions in the South, East China, Central South, and South China. In East China, the building materials are mainly led by private enterprises such as Shagang, with more diverse quotations, and the plates are mainly led by a few companies such as Wuhan Iron and Steel and Zhongtian.

In the Central South region, both building materials and plates are mainly led by Wuhan Iron and Steel resources, and in the South China region, the building materials are mainly led by Shaogang of the Baosteel system, and the plates are mainly from the north to the south, including Ansteel, Hebei steel mills, East China steel mills, and Wuhan Iron and Steel's influence is not small.

At the same time, after the production of Baosteel Zhanjiang Base, it is gradually gaining the right to lead in the South China region. After the merger of Baosteel and Wuhan Iron and Steel, the building materials and plates in the three major southern regions. In East China, wear-resistant steel and high-strength steel, with the efforts of Wuhan Iron and Steel and our traders, after 10 years of development, the pricing of wear-resistant steel is mainly based on the pricing of Baowu.

So, although the output share of Baowu after the merger is still not high, it has a strong influence in three different dimensions of variety steel, spot market, e-commerce platform, and the three major southern regions. Therefore, the merger at that time was undoubtedly very successful, regardless of whether the production level was integrated, or how deep it was, it did not affect the significant enhancement of Baowu Group's market influence, and this enhancement is more capable of solving the current problems faced by the steel industry than the integration of production.

Issue of Resource Mismatch

From a strategic perspective, the biggest benefit brought to the two companies by the merger of Baosteel and Wuhan Iron and Steel is on the financial level. The most important is the "state-owned capital investment management company pilot." With this pilot, it is legitimate to use the capital market as a starting point to integrate state-owned enterprises in difficulties in various places. There are many such enterprises, and they all have certain characteristics, such as Baotou Steel's rare earth, Ma'anshan Iron and Steel's wheels and H-beams, etc. Moreover, the competition in the steel industry has now turned into a cash flow competition, losses, environmental protection equipment, high financial costs, energy leverage, and urban steel plant relocation, all are squeezing the cash flow of steel enterprises. It should be said that the most important resource in the current steel industry is capital. The merger of Baosteel and Wuhan Iron and Steel means the birth of a company with huge cash flow (Baosteel's accumulation + state-owned assets supervision and administration commission's support + inclination of Shanghai, Hubei, and Guangdong), which will naturally play a huge role in promoting the rational allocation of other resources. So, the optimization of resource allocation needs to be combed by oligopolistic enterprises like Baowu.

Soft Power-related Issues

The first is Baosteel's technology and management level. People who have not been to Baosteel may not realize it. As an agent of Baosteel, the author has to stay in Baosteel for more than 3 weeks every year. Baosteel has the most standardized board of directors of state-owned enterprises (to avoid the strategic risk brought by the change of the person in control), the only steel enterprise in China that is at the forefront of technology (high-strength automotive panels + white body + high magnetic induction oriented silicon steel + intelligent manufacturing and robots + environmental governance), and the steel enterprise with the highest technical and non-technical level of workers in China (inventor workers + high-skilled talents + spirit from top to bottom), the management level is the most comprehensive, Baosteel is not the same level as other enterprises in China. With three Baosteels, China's steel industry is worry-free.

The second is the integration of enterprises. To be honest, the production of Baosteel and Wuhan Iron and Steel does not need to be integrated. Although steel is a scale benefit, this scale is limited. At present, the single-plant scale has reached 16 million to 18 million tons, which has reached the limit of logistics and management. Therefore, the factories of Posco's Gwangyang, several factories of Nippon Steel, and domestic Baosteel shares, Tangshan, Shagang courtyard, etc., do not exceed this scale.

The so-called integration effect brought by integration is mainly: 1. centralized procurement of raw materials, 2. planning and production line synergy, 3. unified product sales strategy, 4. logistics synergy, 5. technology and patent sharing, the effects of these aspects are visible. The invisible is the cultural and management level. This time, the merger of Baosteel and Wuhan Iron and Steel, market synergy > strategic synergy > logistics synergy > technology synergy, and whether the cultural level is unified is not so important.

The third is the industry's de-capacity. In short, it takes at least 2-3 industry cycles. At the bottom of the first cycle in 2015, some enterprises withdrew, and some enterprises were injured, eating up the old bottom of decades, and once shut down, and then came back to life when the steel price rose. Currently, in 2024, we are experiencing another cycle bottom, and there will be a batch of enterprises that will die. After going through these two or three rounds, the capacity will naturally be removed. So, this process is not a continuous trough to reach the bottom in one step. With other enterprises exiting or seeking to be acquired, Baowu's advantages will further expand, eventually becoming an oligopoly. With the improvement of industry concentration, traders like Baohui Steel Limited also accompanied Baowu Group to build a modern steel supply chain system.

Conclusion

The purpose of the Baowu merger is, of course, monopoly, and monopoly is to obtain "the right to speak." This also indicates that China's steel industry will make a stronger voice in the international market. For mines, for trade protection, there is finally a shield to defend, as for whether it can counterattack, we will wait and see.