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ArcelorMittal says Chinese steel game changer ‘good news’

LiveMint logoLiveMint 16-06-2014 Bloomberg

ArcelorMittal SA, the world’s largest steel maker, welcomed the potential removal of a near 10-year block on overseas takeovers in China’s steel industry.

ArcelorMittal is one of the few foreign steelmills with investments in China since the ban on overseas control was imposed in 2005. The world’s top producer and consumer is considering scrapping the ban which may be a catalyst for global mills to revive a push into China’s $423 billion steel sector where demand is seven times greater than in the US, the next biggest market.

“It’s good news that the government is moving forward on reforms and liberalization on foreign investment,” Lakshmi Mittal, the billionaire chief executive officer of ArcelorMittal, said in an interview in Loudi, in China’s Hunan province. “Whether we will like to invest more in this country or we will not, will depend on the future development of our various projects.”

China’s steel output may reach 1.1 billion metric tons in the next 10 years driven by urbanization, BHP Billiton Ltd., the world’s biggest miner, said this month. That would be 41% more steel than it made last year. It consumed about 700 million tons of the alloy last year, eclipsing the 95.6 million tons used in the US.

“Automobile production in China, already the world’s biggest market, may climb about 60% in the next eight years,” Mittal said on Sunday, adding his company is focusing on making steel for industries including vehicles and white goods in China.

“Chinese mills, which produce about half the world’s steel, have been plagued by challenges and are seeking better technology and higher-value products such as autosteel to help stem losses and improve productivity.”

Game changer

“Talks over the near-decade long ban come amid a wider push by China’s leadership to boost foreign investment and to open up its state-owned industries. The nation has already announced plans to seek private capital for its top energy companies.

It can be a game changer,” Tom Price, a global commodities analyst with UBS AG in Sydney, said by phone. Mills with their own iron ore reserves may be more attractive to companies such as ArcelorMittal and South Korea’s Posco.

About 80 of China’s major steel makers had a combined loss of 2.3 billion yuan ($370 million) in the first quarter in what’s been described as the harshest operating environment in history. Steel futures in Shanghai are trading near the lowest since their 2009 debut and some mills have faced a credit squeeze as the government moves to curb overcapacity, worst in construction steel, and to protect the environment.

The glut of unused capacity reached 300 million tons last year, according to the China Iron and Steel Association. The nation’s capacity utilization rate dropped to 74% in 2013, the lowest in more than a decade.

Wait and watch

“China already has built overcapacity and this capacity needs consolidation,” Mittal said in Loudi at the opening of the company’s $832 million venture in the Asian nation. “Some of the foreign investors would like to wait and watch what’s going to happen to these over capacities.”

“Smaller mills with 5 million tons of annual capacity may be the first targets for foreign investors as they are usually more efficient and have expertise in specific products,” said Wu Wenzhang, chairman of researcher Steelhome.cn. Investors may not rush to take control of state-mills, according to BOC International Ltd., Bank of China’s investment banking unit.

“State-owned mills may not be appealing to foreigners unless China has clear policies to help improve their efficiency by slashing the redundant payrolls,” Le Yukun, head of metals and mining with BOC International, said from Shanghai.

Opposing views

“Still, talks over the deregulation of foreign ownership of steel mills may take time because there are opposing views on the issue,” Li Xinchuang, deputy secretary general of the China Iron and Steel Association, said last month. A call and fax to the Ministry of Industry and Technology in Beijing last week weren’t responded to.

For foreign steel makers such as ArcelorMittal, their ambitions in China have been curtailed amid the ban. Luxembourg- based ArcelorMittal in 2008 shelved a plan to take majority control of non-state China Oriental Group Co. after failing to win approval. China in 2009 rejected a plan by Russia’s Evraz Group SA to take 51% of Delong Holdings Ltd. Evraz currently has 15% in Delong.

“Automobile output may rise to 30 million units to 35 million units in the next seven to eight years, from 22 million units now,” Mittal said on Sunday. The new auto venture with Hunan Valin Steel Co. Ltd has annual output capacity of 1.5 million tons. “At this time our agenda is to participate in this niche market,” Mittal said. Bloomberg

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