Gov’t-Backed Consolidation of Hebei Steel Industry Melts Away

01.15.2014 19:10

Gov’t-Backed Consolidation of Hebei Steel Industry Melts Away

Three years after Hebei Iron & Steel Group incorporated 12 smaller players, everyone involved wants to go their own way

By staff reporter Zhang Boling

(Beijing) – Hebei Iron & Steel Group and the companies it incorporated in a government-backed consolidation three years ago want to undo the arrangement. In 2010, the government of the central province of Hebei, which produces about one-quarter of the country’s steel, arranged a consolidation of Hebei Iron & Steel, the country’s largest steelmaker, and 12 private firms in the hopes of boosting competitiveness and better regulating the industry.There are two main reasons for the break-up, said an executive at Hebei Iron & Steel who did not want to be named. Hebei Iron & Steel wants to focus on managing its assets and the private companies no longer want to remain part of the group.ompanies) are all still independent.”

Hebei Iron & Steel was formed in June 2008 in a merger between Tangshan Iron & Steel Group and Handan Iron & Steel Group. It is the world’s second-largest producer of steel and in 2013 was ranked 269th in Fortune Global 500 companies.

Hebei Iron & Steel incorporated the privately run steelmakers, including Jiujiang Wire Rod Co., Hebei Jingye Group and Yanshan Iron& Steel Co., at the end of 2010. Under the agreement, it would provide technology and management resources; give the firms access to it sales network; and include them in its deals for the purchase of raw materials.

In return, it got a 10 percent ownership stake in the companies. The firms did not receive any capital from their new parent.

Hebei Iron & Steel was to oversee business development of the subsidiaries and send management teams to them at their request.

“They were not enthusiastic about that,” the Hebei Iron & Steel executive said. “Why would any private company want to ask our people to manage their company? So this became a mere formality.”

Also, parts of the deal were never realized. “Before the consolidation, Hebei Iron & Steel promised to integrate purchases and sales, providing us with cheap supplies of raw materials and good sales networks, but none of that was carried out,” a source from one of the private companies said.

One of the big reasons some of the private steelmakers wanted to join forces with Hebei Iron & Steel was to gain legitimacy because they had been operating without government licenses due to strict controls on capacity. Attaching their names to a state-backed company meant they no longer needed to fear the regulator.

But in 2012, the Ministry of Industry and Information Technology changed the regulations for the steel industry, paving the way for the private companies to gain legal standing. As of December, four out of the 12– Jiujiang, Jingye, Yanshan and Tangshan Songting Iron& Steel Co. – had received licenses.

Both Jiujiang and Jingye have posted their own financial data – separate from Hebei Iron & Steel – since November.

The fact that Hebei Iron & Steel has been losing money has not aided the consolidation. It lost 763 million yuan in the first nine months of 2013, a financial statement shows, and its chairman, Wang Yifang, resigned in December.

“Some companies under Hebei Iron & Steel are struggling and some are even surviving on debt,” the company’s new chairman, Yu Yong, said at a meeting in December. “Getting back to profits in 2014 is the group’s biggest goal.”