A worker takes quality samples of molten iron from a furnace at Wuhan Iron & Steel Group Corp in Wuhan, Hubei province.[Provided to China Daily]

Baosteel to merge with Wuhan Iron & Steel in key part of plan to consolidate sector, cut overcapacity

Two of China's biggest steelmakers agreed to merge their listed units, moving a step closer to a union that would create the world's second-biggest mill.

The publicly traded arm of Shanghai Baosteel Group Corp, China's largest steel company, will swap shares with the listed unit of Wuhan Iron & Steel Group Corp, China's sixth-largest steelmaker, the smaller company said in a statement on Tuesday.

The parent firms remain in talks about restructuring, Wuhan Iron & Steel said, without elaborating.

The plan is part of the government's push to consolidate the steel industry to combat overcapacity.

The merger of Baosteel and Wuhan Iron & Steel is a major move in the transition from low-end supply to high quality manufacturing, said Li Xinchuang, president of the China Metallurgical Industry Planning and Research Institute.

"The steel industry is a sector playing a major role in China's capacity downsizing. Through the merger, the two companies will draw on each other's respective strengths," said Li.

Baosteel has its presence in the Yangtze Delta Region, the Pearl River Delta Region and the Xinjiang Uygur autonomous region. Wuhan Iron and Steel has its major bases in Hubei and Yunnan provinces, and the Guangxi Zhuang autonomous region.

The combination of the two companies will connect their scattered production bases into one organic whole, said Li.

According to a report by Everbright Securities, the merger of Baosteel and Wuhan Iron & Steel will usher in a period of more rational development in China's steel industry.

The report said that State-owned enterprises account for 46 percent of China's crude steel output, but their losses take up more than 90 percent of the total.

Baosteel is the world's fifth-largest steel company by output. It achieved net profits of 1.8 billion yuan ($269.9 million) in 2015, down 78 percent year-on-year. Wuhan Iron & Steel registered losses of 7.5 billion yuan last year.

Wang Guoqing, director of Lange Steel Information Center, an industrial consultancy in Beijing, said that the merger of the two companies will bring down production costs.

"Both Baosteel and Wuhan Iron & Steel have factories in urban areas, which contributes to increased traffic jams and pollution. As a result, they will be moved elsewhere sooner or later. As one group, if they are to relocate the factories to places closer to sea ports, or in other words, Baosteel to Zhanjiang Port in Guangdong province and Wuhan Iron and Steel to Fangcheng Port in the Guangxi Zhuang autonomous region, it will greatly reduce their transportation costs," said Wang.

Du Juan contributed to this story