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Wu Po-depth analysis of the merger: Wuhan Iron and Steel Baosteel than the difference in where?

Wuhan Iron and Steel shares are listed companies in the China Hot Dipped Galvanized Steel Sheet industry in 2015, "Wang loss", in net loss of more than 7.5 billion yuan, total liabilities of nearly 70 billion yuan, asset-liability ratio exceeding 70%. However, this is only the tip of the iceberg WISCO financial distress. Wuhan Iron and Steel Group in 2016 the first phase of ultrashort financial prospectus, as of the end of September last year, the Wuhan Iron and Steel Group's total liabilities of nearly 150 billion yuan, of which current liabilities amounted to 118.4 billion yuan.
Today day loss of more than 20 million of the Wuhan Iron and Steel is to be merged. "China Kobelco" merger rumors come true, while Baosteel and Wuhan Iron integration path, finally officially surfaced.
China Steel "Big Mac" - Wu Po merge
Has a production capacity of 60 million tons, "China Kobelco" was born soon.
Following the car north and south and central enterprises Shipping (COSCO, China) merger, Minmetals and MCC after the reorganization, the central rate of steel is about to usher in a Century reorganization.
September 19, the controlling shareholder of the joint restructuring plan of Baosteel and Wuhan Iron and Steel, Baosteel Group, Wuhan Iron and Steel Group, the controlling shareholder of shares SASAC recently been approved, and has been submitted to the State Council. Baosteel Group will be tentatively named "Chinese Wu Bao Steel Group Co., Ltd.", the Wuhan Iron and Steel Group's equity free transfer treasure Wu Group. After the completion of the reorganization, Wu Po Group will become the controlling shareholder of Wuhan Iron and Steel Group.
Listed companies of the two groups will be convertible by the way, by the merger of Baosteel Wuhan Iron and Steel shares. Baosteel's announcement shows that 19 evening, Baosteel Group intends to transfer the shares to free Chengtong Holding, the new Investment and CNPC, the transfer of shares of listed companies accounted for 2.45% of total share capital, 2.45% and 4.86%. This was interpreted as the industry, the two sides are intended for the beginning of the restructuring plan was adopted "pave the way" at the shareholders meeting.
Baosteel by way of convertible merger Wuhan Steel shares is one of the core elements of the restructuring plan. After the completion of the convertible, Wuhan Iron and Steel shares of all existing assets, liabilities, business, personnel and so on will be dedicated to the establishment of Wuhan Iron and Steel Group subsidiary reorganized successor, after delivery, all shares of the company are also controlled by Baosteel.
As of June 30, 2016, Baosteel Group owns up to 79.737% of the shares, Wuhan Iron and Steel Wuhan Iron and Steel Group holds 57.66% stake in the shares. The two groups have an absolute "right to speak" their listed companies.
Because the two groups are stakeholders need to abstain from voting, right through the actual entitlement programs in the hands of small shareholders.
However, in six or seven months this year, June 26 before and after the restructuring announcement, the plurality of the shares of Baosteel, Wuhan Iron and Steel free transfer move, intentionally or unintentionally, by making a restructuring plan for the "Deployment."
According to the listed company announcements, Wuhan Iron and Steel Group in February this year, intends to hold some 500 million shares free of charge transferred to the China Ocean Shipping (Group) Corporation (hereinafter referred to as "COSCO Group"), representing approximately 4.95% of total equity, and on June 21 to complete the transfer registration.
Wuhan Steel shares mid-year report shows that the top ten shareholders, COSCO Group ranked second, held 4.95% stake in the holding exceeds the sum of the third and fourth largest shareholder. Third, and fourth largest shareholders are the China Securities Finance Co., Ltd. (hereinafter referred to as "card CICC"), the Central Huijin Asset Management Co., Ltd., Wuhan Steel shares were held by 2.03%, 1.27% stake.
Baosteel shares, according to the notice issued by the evening of 19, Baosteel Group intends to transfer the shares to free Chengtong Holding, the new Investment and CNPC, the transfer of shares of listed companies accounted for 2.45% of total share capital, 2.45% and 4.86%. Among them, the CNPC free transfer of shares has been approved by SASAC. June 17 this year, CNPC had Baosteel Group free transfer of 624 million shares of A shares, representing 0.34% of the total share capital of the oil.
As of June 30, the company ranked second margin before share the top ten shareholders of Baosteel stake of 2.7%. This means that the free transfer of the shares to be registered after the completion of the transfer, CNPC will be with 4.86% stake, becoming the second largest shareholder Baosteel, has a background of SASAC Chengtong Holdings, the country will become a new investment fourth, the fifth-largest shareholder Baosteel, while the rest of the top ten shareholders stake were less than 1%.
Even Baosteel and Wuhan Iron and Steel Group needs to avoid voting convertible program, the end result will be firmly in control of the undertaking free transfer of capital in the hands of the central rate.
Steel enterprises mergers and acquisitions with the past is different from this merger is not to eat small form, but the combination of two large steel mills. National Plan to 2025, the top ten steel enterprises crude steel production in the country accounted for not less than 60%, the formation of 3-5 in the world with a strong competitive large steel group.
Wuhan Iron and Steel Baosteel than the difference in where?
The combined pre struggle
As early as 2004, the WISCO Deng Qilin over time, above there, "Wu Po restructuring" of intent. Wuhan Iron and Steel was the only industry in the middle level of capacity, capacity 9 million tons, less than one-third of Baosteel, there is a great distance line from steel prices, restructuring and if Baosteel, Wuhan is not much advantage at all.
Perhaps because of this, the management of Wuhan Iron and Steel has not been demonstrated with the meaning of Wuhan Iron and Steel after the founding of New China's first large steel prices, Baosteel established in the reform and opening up. On qualifications, Wuhan Iron and Steel Baosteel greater than, on the administrative level, both of the same level. It stands to reason that Baosteel Wuhan Iron and certainly do not want to be eaten.
So, this old steel companies under the leadership of Deng Qilin launched a great leap forward development, mergers and acquisitions E Steel, Liuzhou Iron and Steel, Kunming Steel, invested 8 at home at abroad for overseas mines in Guangxi Fangchenggang new steel Baosteel Zhanjiang base and the base of confrontation. The reason is very simple, only the scale is large enough, the possibility of Wuhan Iron and Steel will be integrated to a minimum.
The problem is that this decision is in WISCO and trend of enemies, this decade is just the down cycle of the global economy, coupled with the hasty decision-making and the slowdown in domestic demand in the real estate industry, Wuhan leaps and bounds in return was a giant losses and layoffs. 2015 8 years, sacked Deng Qilin, general manager Ma Guoqiang airborne Baosteel Wuhan Iron and Steel, combined with the influx coincided with the central enterprise restructuring combined, this has created new opportunities for the treasure Wu restructuring.
In contrast, the Wuhan Iron and Steel Baosteel not so heavy historical burden, and in the introduction of technology, operations management and cost control is excellent, its level of profitability among the best in domestic steel prices in.
In terms of products, Wuhan Iron and Steel has the advantage of silicon steel and heavy rail, and the advantage of Baosteel auto sheet and appliance version, the latter of higher value-added, and the influence by the real estate downturn is also smaller, which is a higher level of profitability Baosteel important reason.
Wuhan Iron and balance up to 70%, a huge loss
According to the China Steel Association data, in 2015 the top 20 steel enterprises losses, almost all state-owned steel enterprises, including Wuhan Iron and Steel, Anshan Iron and Steel, Shougang, Maanshan Iron and Steel, Bao Steel, Benxi Steel and other steel-word famous enterprises, including Wuhan Iron and Steel to loss 6.986 billion yuan A-share loss is called king.
The profitability of steel prices 20, can be grouped into three categories, one is private steel enterprises, including Jiangsu Shagang, Hebei Wu'an, Hebei aspect and so on, the majority; the second category is made of steel, for example, the amount of profit ranked CITIC Pacific Special steel Special steel Group is the manufacturer; the third category is a higher level of management of the state-owned steel enterprises, such as Baosteel, River steel, Shandong Iron and steel (600,022, stock it) Group, a small state-owned steel enterprises.
This shows that, in order to achieve overcapacity, fierce competition in the steel industry profits must have three characteristics, or have the institutional advantages of private enterprises, and there's Shagang is typical; either run higher value-added steel, CITIC Pacific Special this is typical of the steel inside; either a higher management level, typical in this regard is Baosteel, Baosteel has long ranked China's most profitable steel prices, but in 2015 profits fell 89%, has fallen behind in Jiangsu Shagang, Hebei Wuan other private steel enterprises.
Although the first half of 2016, China's steel market improved, large corporate profits have improved, but profits Wuhan Steel shares but did not show significant improvement, the 2016 semi-annual report of its total liabilities reached 68.39 billion yuan, asset-liability ratio over 70% wherein the net current liabilities of 16.03 billion yuan, profit for the period was only 270 million yuan, down more than 47%. In addition, as of the end of September 2015, Wuhan Iron and Steel Group, the huge liabilities, current liabilities accounted for more than 83%, indicating that Wuhan Iron and Steel Group faces higher short-term liquidity risk, bring some pressure this or will the overall performance.

The main motivation of merger
Baosteel and Wuhan Iron and Steel merger, not an accidental event, behind the great merger of this century, in essence, is a microcosm of the development process of the global steel industry. Iron and steel industry boom cycle fluctuations obey macro, merger by the economic situation impact, which means that once the economic slowdown, a lot of reorganization and acquisition occurs.
In the United States (as shown below), the United States in 1890 overtaken Britain to become the world's largest steel producer, while Rapid industrialization. Late 19th century recession, the US steel industry can be dispersed in this period, production management confusion, inefficiency.

During 1898-1903 there were mergers and acquisitions since 2653, involving a total assets of $ 6.3 billion, eight horizontal mergers and acquisitions to become. After the first large-scale mergers, the birth of the nation's tobacco, DuPont, US Rubber and other large companies, 100 of the largest companies control 40 percent of the country's industrial capital. This is to promote the steel industry was born in the United States steel, thereby reducing competition, gain economies of scale, to catch up with the wave of mergers and acquisitions. 1910 US steel production to 26.5 million tons, accounting for total world production Sichengyishang.
Promote the integration of overcapacity
Steel industry consolidation occurred in overcapacity, industry profits are compressed period. Integration of resources brought about reduced competition, efficiency, enhanced bargaining power and extensive product line in favor of the steel companies in the industry trough survive.
Europe and Japan before the consolidation of the steel industry in both have a large production capacity, production has been increasing. But observers crude steel apparent consumption, consolidation occurred in 1970 and 2000, excluding financial bubbles 90, 97 outside the Asian financial crisis are apparent consumption of Japanese historical lows, like the European Union, the 1990s and 2000 in integration eve apparent consumption have experienced a low level for a long time (Figure 1). High yield and low consumption, on behalf of the industry is relatively low. Japan's postwar rapid economic development, from the 1950s to the early 1970s, experienced a long period of high growth, crude steel production is rising (Fig. 2); 1971 integration is completed, the formation of the iron and steel industry of the five corporate structure.


European integration of resources from two aspects. First, take advantage of Eastern Europe, a large number of low capacity utilization, high capital investment mills; the second is the integration of Western Europe through the development of the Community industry resources. Before the 1990s, each through a complete cycle industry, crude steel production is declining. In the 1990s, after the integration is completed, output volatility rises (Fig. 3). Europe through integration of resources, opportunity 90 years strong demand in emerging markets.

Why integrate more difficult in the rising phase of the steel industry cycle? On the demand speed, tight market, the steel companies are more inclined to become bigger and stronger, a huge legal and transaction costs associated with the integration to make them more willing to fragmentation. This is reflected in the Chinese steel production before the financial crisis is particularly evident. Speed demand period, high taxes, high investment in the steel industry as the local government to support the object, resulting in excessive growth of production capacity, so that after weak demand high inventory.
In addition, the integration can reduce competition in the industry is often easier to complete, so in spite of frequent cross-border consolidation of the steel, but regional integration success rate is not high. Regional integration of the acquired company will not reduce the number of local steel market, and may even intensify competition. For example, Brazil's national ferrous metallurgy companies in 06--11 years proposed 5 pen cross-border acquisitions is not completed, including the November 2006 attempt to 12.85 billion acquisition of Corus Group, part of the reason is that although the consolidation can expand their business lines and the Offeror international market, the congestion on European steel production was unprofitable.
M & A to improve international competitiveness, Wu Po combination will be ranked first in China and second in the world
1901 US steel industry consolidation, the first American to occupy the world's steel production until the 1970s. Japanese steel industry to complete the integration of the 1970s to replace the US as the largest steel producer. The European steel industry began to consolidate the 1990s, to 97 years accounted for seven seats (as shown) in the top ten global steel.

As can be seen from the world's top ten steel geographical variation (Fig. 4), steel production and distribution of energy distribution is consistent with economic growth, rapid economic growth of the region in a better position and power industry consolidation, including the post-war 1970s Japan, the 1990s toward a unified Europe, and economic status over the past decade the rapid development of the growing importance of China (Fig. 5). China is currently about half the world's steel production, iron and steel group of six in the top ten in the world, should promote the integration of production concentrated through mergers and acquisitions, industry influence and improve international competitiveness.


The Po Wu merger, intended to create a more internationally competitive steel enterprises giant. Wu Bao-Steel belong to the SASAC straight pipe, the smaller restructuring difficult, and large enough, strong after the merger, will help improve the overall competitiveness of Chinese steel enterprises.
Two strong influence on the pattern of the merger
Homogenization of competition in product markets will significantly improve the occupancy rate, market price against downside risks to capacity building
On two steel products distribution, sheet metal products is relatively high degree of coincidence, after the merger, the market share will generally reached 40-90%. The market share of some high value-added products will have improved significantly.

Wu Po merger would create the world's largest silicon manufacturer
Wuhan Iron and Steel after the original 1.92 million tons of cold-rolled silicon steel production capacity of 1.3 million tons of cold-rolled silicon steel Baosteel production capacity combined, will become the world's largest silicon production enterprises.
Silicon steel products mainly used for all kinds of motors, generators, compressors, motors and transformers cores, electricity, electronics and other industries indispensable raw material products. Especially oriented silicon steel products, iron and steel industry was pearl crown is called, its end demand is highly dependent on the power grid construction, oriented silicon steel market demand and national electricity correlation coefficient of 0.99 or more, can be used as the national level of economic development first index. 2015 national grain oriented silicon steel output of 1.21 million tons, consumption of grain oriented silicon steel has been maintained at 1.2 million tons / year level, Wu Po-oriented silicon steel merger would yield more than 70% market share. Scale driven by high profits, the next three to five years, oriented silicon steel production capacity of a new round of explosive growth, downward pressure on market prices will greatly increase the level of fear profits will be substantially reduced, so at this time to produce the combined effect can be effective against the risk of future price declines.
Two strong merger will enhance the bargaining power
Prior to the merger, Baoshan Iron and Steel production of about 35 million tons, about 25 million tons Wuhan Iron and Steel, Bao Wu after the merger, the two add up to about 60 million tons of crude steel production capacity, equivalent to the raw material iron ore accounted for China's total imports of iron ore 1/10 , huge volume, will increase the company with chips supplier negotiations.
Wins the domestic South China, Southwest, South and Southeast Asia
A large speed and passion
The beginning of the Wuhan Iron and Steel Baosteel Zhanjiang and Fangcheng base base established primarily to comply with the requirements of the development of urbanization carried out the transfer of production. Baosteel Zhanjiang base is gradually depressed production in Shanghai and Guangzhou Iron and Steel have been reorganized, Shaoguan Steel and other steel mills, out of nearly 20 million tons of backward production capacity on the basis of inefficient building up. From May 2013 to lay the first pile, to September 25, 2015 One blast furnace ignition, to July this year, II ignition blast, just three years and two months, Baosteel Zhanjiang base has been basically completed a project building, entered the pre-production stage, the formation of an annual output of 8.23 million tons of hot metal, 8.928 million tons of steel scale capacity. At present in Zhanjiang steel production of automotive sheet product certification has been carried out, and the South has a number of car manufacturers for cars while 102,200 tons of steel, pipeline steel hot-rolled products have begun to India, Spain exports.
Wuhan Iron and Steel Fangchenggang base, relatively slow development. In March this year opened a cold-rolled production line, production capacity of 1 million tons.
Homogenization of competing products combined, more favorable radiation in South China market
Wuhan Iron and Steel Fangchenggang base main products for the automotive, appliance manufacturing hot rolled sheet required, galvanized sheet, color coated sheet metal and other high-end oriented. Baosteel Zhanjiang project in the South China automotive, appliance, machinery and construction industries as well as marine board with sheet metal, steel, high-quality carbon structural steel as the main species. Both automobile and home appliance plate plate market-oriented, but 200 km away, after the merger of the regional market (South China, Southeast Asia) has a very significant influence on the market.
So the overall look, if Wu Po merge smoothly, Fangchenggang project should speed up the pace gradually withdraw from inland production not competitive fields.
Place the interests of big reshuffle, Wuhan and then lost a possible headquarters of central enterprises
The merged group intends to name "Wu Bao Steel Group", formerly Wuhan Iron and Steel Group, a new subsidiary, to be renamed "New Industrial Development Corporation Wuhan Iron and Steel."
Wuhan has been another central enterprises powerhouse Beijing, Shanghai, Guangdong and beyond, following the loss of Gezhouba, China long voyage and Wuhan Iron and Steel, Wuhan Dongfeng still has, Wuhan Research Institute of Posts and two central enterprises. In addition, the Wuhan Research Institute of Posts and Telecommunications was also reported a few years ago, another central enterprises to integrate the message, if this rumor is true, Wuhan, it would be a hit.
Among them, the Gezhouba headquarters had by the Yichang moved to Wuhan, was later integrated into the Chinese energy Construction Group, China CSC is another in Wuhan of central enterprises, the main river transport, and later with Sinotrans Group was integrated into Sinotrans, in this a central enterprise restructuring tide, Sinotrans has been incorporated into the China Merchants, China Merchants's become two companies.
Wu Po new headquarters after the merger, whether on the go, it will cause losses to another city.
China Steel "north weak south strong" pattern will be broken
Domestic steel industry, the long-standing "north weak south strong" pattern "North South transport of steel", the Wu Po merger will break this pattern.
At present, China's steel industry centers in Hebei, Liaoning, Shandong, the Northwest and the Yangtze River region, the entire South China barely large steel enterprises. For example, Guangdong Province is the largest steel consumer market, but the steel self-sufficiency rate is only about 40%, most need to be transferred from other provinces or steel imports.
It was in this huge consumer market, coupled with the local government to actively promote, Baosteel and Wuhan Iron and Steel years ago down big chess in southern China. Baosteel Zhanjiang project and Wuhan Iron and Steel Fangchenggang project, according to the million-ton capacity construction investment, Baosteel and Wuhan Iron and recreating a great momentum in southern China. Especially Baosteel Zhanjiang project started in order to promote, at the Shanghai index down production of this Part.
It is noteworthy that, Baosteel Zhanjiang project and Wuhan Iron and Steel Fangchenggang project are located in the northern Gulf, where sitting on a natural harbor, with a significant cost advantage in imports of iron ore and steel transport, and close to East Asia, Southeast Asia, South Asia three huge emerging markets, is considered the geographical center of the Asian coastline and population distribution, the market potential is huge. Baosteel's management has revealed the future Southeast North Bay area will have more than 80 million tons of steel production capacity, there may be a new global steel centers.
In addition, Wuhan, Shanghai two city centers are in the "retreat into three" wave of industrial transfer among the urban industrial enterprises to move out sooner or later, Baosteel and Wuhan Iron and Steel industry moved south across the board, the domestic steel industry "strong north weak south" pattern will be changed, there may even be the case of the steel industry as a whole south of the center of gravity.

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