China, the world's No.1 steel manufacturer and consumer, will not allow foreign steel producers to hold controlling stakes in domestic steel companies, Qi Xiangdong, deputy secretary-general of the China Iron and Steel Association (CISA), said Wednesday.

 

Foreign steel producers, if they want to invest in China's steel sector, must "have independent intellectual property in steel-making technologies and have an annual output of 10 million tons," Qi told China Daily.

 

These restrictions will be included in a new national steel industry policy, which is expected to be released next week, he said.

 

They come as foreign steel giants are speeding up mergers and acquisitions (M&As) in China's steel industry, and even seeking majority stakes in domestic steel mills.

 

Mittal, the world's biggest steel group, will buy a 36.67 percent stake in Valin Iron and Steel Co. Ltd., a Shanghai-listed steel maker in central China's Hunan Province, the Chinese company said last month.

 

The stakeholding is less than initially intended.

 

In January, Mittal and Valin's state-owned parent company agreed to a 37.17 percent stake each in the Shanghai-listed firm.

 

Arcelor, the world's No.2 steel company, has also been seeking a controlling stake in Laiwu Iron and Steel Co. Ltd., also a Shanghai-listed steel maker in east China's Shandong Province.

 

Both Valin and Laiwu are among China's top 20 steel makers.

 

Analysts said the expected revised steel policy indicates that the Chinese government is unwilling to see foreign giants in control of the domestic steel sector.

 

"The steel sector is one of backbones of China's steadily growing economy. Therefore, it should not be controlled by foreigners," said Tian Shuhua from China Galaxy Securities Co. Ltd.

 

However, Tian said foreign steel giants still have many other business opportunities they can tap into because China's steel sector and market will continue to grow rapidly.

 

"Foreign steel giants could, for example, accelerate technical collaborations with Chinese partners," Tian said.

 

Qi added that the new steel policy will also boost cooperation between domestic steel makers. Increased cooperation could help improve the fragmented sector's competitiveness.

 

Zhou Xizeng, from CITIC Securities Co. Ltd., said: "The new steel policy also indicates that the government hopes to be the one to put China's steel sector in order, not the foreign giants."

 

Luo Bingsheng, another top official from the steel association, last month suggested that Chinese steel companies should form four to five bigger groups with an annual steel output of more than 30 million tons through M&As within the next two to three years.

 

Anshan Iron and Steel Corp. and Benxi Iron and Steel Corp., two steel heavyweights in Liaoning Province, are expected to merge to form a new group soon, said sources from the two companies. The new entity should have a production capacity of more than 20 million tons.

 

According to Qi, China produced 272.8 million tons of steel last year, up by 22.7 percent from 2003, and imported 13.2 million tons of steel products in the first half of this year, up 26.8 percent from a year ago.

 

CISA has predicted that this year's output will reach 300 million tons.

 

(China Daily July 14, 2005)