Baosteel Group Corporation, the parent of the company, plans to establish a joint venture with two local steelmakers in Guangdong Province. The new joint venture called Guangdong Iron & Steel Group will be based in Guangzhou City with registered capital of RMB 35.86 bln, of which Baosteel Group will invest RMB 28.69 bln in cash to hold an 80% stake, while the State-owned Assets Supervision and Administration Commission (SASAC) of Guangdong Province and Guangzhou City will jointly hold a 20% stake. The 20% joint stake will constitute an injection of state-owned net assets of Guangdong Shaoguan Iron and Steel Group Company Ltd. and Guangzhou Iron & Steel Group Company Ltd. into the joint venture.

Market analysts believe that the establishment of the new steel group will have a limited impact on the company. Baosteel Group, which has been actively engaged in the mergers and acquisitions of domestic steel assets, has rarely injected such assets into the company before. Chen Yin, deputy general manager and secretary of the board of the company, disclosed that the parent company will inject high-quality steel assets into the company at the appropriate time. Analysts expect that Guangdong Shaoguan Iron and Steel Group Company Ltd. and Guangzhou Iron & Steel Group Company Ltd., which have had to give up their main lines of business to the new joint venture, may have to sell their shell resources and transform their businesses.

As Baosteel Group needs to invest RMB 28.69 bln in the new steel joint venture, rumor has spread that it may raise RMB 60 bln from an IPO based in New York, London or Hong Kong. Xu Lejiang, Chairman of the Board of Baosteel Group claimed that it has sufficient capital supply from its strong profit growth in the past several years.

The new Guangdong Iron & Steel Group will be the third provincial steel group set up after Heibei Iron & Steel Group and Shandong Iron & Steel Group. Such regional mergers could accelerate the elimination of backward steel manufacturers and consolidate the steel industry in China. As a result, the energy and resource efficiency in the steel industry will be much-improved. To support the establishment of Baosteel's 10-mln-ton per year Zhanjiang Iron & Steel project, Guangdong Province has to shut down other backward iron & steel manufacturers by 2010, whose outputs total a 10-mln-ton per year capacity.

At present, Guangdong Province is the biggest steel consumer among all provinces of China. It is expected that its steel demand will reach 50 mln tons per year by 2010. The company is expected to reach a 50 mln ton iron & steel manufacturing capacity by 2012.

Source: China Securities Journal

Date: 24 Jun 2008

CN01/MZ/AR/KM