China's Baoshan Iron and Steel (Baosteel) may soon become the second-largest steel producer in the world if the deal to acquire its rival Wuhan Iron and Steel, pushes through, as part of the country's efforts to revive the ailing industry.
Reuters cited a statement released by Wuhan on Tuesday, Sept. 20, which said that Baosteel will absorb the company and shareholders will be given new shares. The deal was previously announced as a merger and will still need government approval since the two firms are both state-owned enterprises.
About 60 million tons a year will be produced by the two companies based on the 2015 capacity, which will make it with Hebei Iron and Steel as the leading firms among China's steel producers.
According to the report, the plan, which was first announced in June, is part of government efforts to combine the two state-owned enterprises in a bid to remove excess capacity by consolidating the country's fragmented steel industry.
The final agreement would also provide an outline for similar proposals that have been announced in the past months, such as the merger of Benxi Steel and Anshan Steel, the report said.
"This is part of the government's efforts to push through supply-side reform and will have a model effect for the new round of mergers and acquisitions," Hu Yanping, an analyst for Custeel.com, said.
In terms of capacity, ArcelorMittal SA, based in Luxembourg, is the world's largest steelmaker, the report said.
Baosteel is confronted with the tough challenge of incorporating its debt-ridden rival amid government efforts to improve efficiency in the country's steel industry.
"Baosteel is a profitable company and Wuhan is heavily indebted and just needs someone to save it," said Richard Lu, an analyst at Beijing-based CRU consultancy.
Lu, however, added that since Baosteel and Wuhan have set up new plants and replaced their old and inefficient system and the deal will not result in reducing their capacity.