Major Chinese Steel Mill to Double Capacity as Xi Cuts Back

    Jianlong Steel Holdings Co., the second-largest private mill in China, is seeking to more than double capacity in the next five years even as the country vows to slash its bloated industry amid global oversupply.

    The company plans to raise capacity to 50 million metric tons a year through mergers and acquisitions from 23 million tons now, Zhang Zhixiang, chairman at the Beijing-based producer, said at a conference on Monday. The group this month restarted production at a factory bought last year from the bankrupt Shanxi Haixin Iron & Steel Group, Zhang told reporters.

    Jianlong has grown from a small mill to one of the world’s top 20 within about 10 years. Zhang says his plans don’t clash with President Xi Jinping’s strategy of moving the economy away from investment in heavy industry to a consumer-led model or with government plans to cut as much as 150 million metric tons of steel capacity by 2020.

    “The biggest problem plaguing the Chinese steel industry is that it’s too fragmented,” Zhang said. “So the foremost priority is to consolidate and to acquire enough size to achieve economies of scale before taking the second step to reduce outdated capacity. That’s the lesson we drew from Japan.”

    Price Rally

    An oversupplied industry creates opportunities for low-cost acquisitions, Zhang said. He’s considering various forms of mergers, including one for example where owners of struggling mills take an equity share in an investment fund, giving up daily management and allowing their mills to be added to a pool of assets. The group would then consolidate the assets and provide support and equity-incentives to management and key staff, he said.

    Jianlong’s restart of the Shanxi plant came after Chinese steel prices rallied more than 50 percent this year at one point and mills enjoyed the best profits since the financial crisis in 2009. The Yuncheng, Shanxi-based mill had been idle since March 2014, according to the official Xinhua News Agency.

    “I feel that most of our problems can be solved if the top 10 steel mills control 70 percent of the market,” Zhang said. “But this consolidation process is best left to market forces.”

    Source: bloomberg