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| November 9, 2000 | atimes.com | ||
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China
Chinese market steels itself for giant listing By Tony Allison China's Baoshan Iron and Steel Co Ltd is preparing for a listing on the domestic stock exchange "in the near future" with an issue that could raise as much as 10 billion yuan (US$1.21 billion), making it by far the biggest ever in the 10-year history of the country's markets. Proceeds from the offering on the A share market, which is reserved for domestic institutional and retail investors, will be used to fund plant expansions and upgrades for the firm's sole shareholder, the state-run Shanghai Baosteel Group Corp (Baosteel). The group has a stated goal of becoming a Fortune 500 company and it could face increased competition from foreign companies once China accedes to the World Trade Organization, most likely early next year. Baoshan Iron and Steel was set up as the listing vehicle for Baosteel, with 64 percent (37.80 billion yuan) of its total core assets. The group is the biggest steel producer in the country, which itself is the biggest producer in the world. The local listing is expected to be followed shortly by an 8 billion yuan global stock offer in Hong Kong and New York. The overseas listings were originally planned for July but were delayed because of market volatility and doubts about the performance of some overseas-listed Chinese stocks. The government earlier this year relaxed a ban on firms listing both abroad and on the domestic A share markets. Baosteel already has four domestically listed sub-units. These include Shanghai Steel Tube Co, which has hard currency shares listed in Shanghai, and three domestic A share firms, which are off limits to foreign investors. Baosteel, generally recognized as one of the better state-run operations in the country, recorded profits of 1.9 billion yuan in the first half of 2000, up 900 million yuan over the earnings for all of 1999. It has set a profit target of 1.8 billion yuan for the entire year. The group has a BB+ negative rating from Standard & Poor's for its long-term foreign currency credit rating. The improvement was attributed to higher steel prices in China, strengthened management at the company, economic improvement both domestically and overseas, and China's initiatives to combat smuggling and encourage exports. Its overseas sales were 1.5 million tons in the first six months of 2000, more than 10 percent of total output. On August 10, Baosteel floated 2 billion yuan ($240 million) in five-year corporate bonds. The annual interest rate was 4 percent, 1.75 percentage points higher than that of a one-year bank deposit. The Huabao Trust and Investment Co Ltd, a branch of the steel giant, sold most of the bonds, to which China Chengxin Securities Rating Co Ltd gave an AAA credit rating, China's highest bond rating. The steel giant's listing had been planned for earlier in the year, but it was delayed pending clearance from the China Securities Regulatory Commission. There are also concerns over the timing as the A share market might be swamped if Baoshan's offer comes to close to that of the Minsheng Bank. China's only private bank plans to raise up to 4.2 billion yuan from an offering of 350 million A shares. Local listing Baoshan Iron and Steel plans to offer 1.88 billion domestic A shares at above four yuan each, which would raise in the region of 10 billion yuan. The flotation will account for about 15 percent of the enlarged share capital of 12.5 billion yuan. The lead underwriter is the China International Capital Corp. The previous largest domestic issue in China was that of the Pudong Development Bank's 400 million shares in 1999, which raised about 4 billion yuan. The domestic A share markets have more than 1,000 listed companies and a market capitalization of more than $500 billion, the third largest in Asia behind Tokyo and Hong Kong. The A share market is much bigger than the B share or H share markets. The B share markets are open to foreign investors, while H shares are Chinese firms listed in Hong Kong. Analysts say that the listing would likely receive a warmer welcome at home, where initial public offerings (IPOs) typically surge on debut. The political climate overseas can also be problematical. Human rights groups opposed to China National Petroleum Corp's investments in Sudan cast a shadow on the IPO of its listing unit Petrochina in New York earlier this year. Steel sector firms usually offer A shares at a price earnings (PE) ratio of between 15 times and 20 times. However, the massive issue might prompt the company to opt for a lower PE than the industry average. Nanjing Iron and Steel Co offered 120 million A shares at about 20.84 times in August, while Beijing Shougang Co offered its IPO of 350 million A share at 16.5 times last September. Group profile State-owned Shanghai Baosteel Group Corporation is China's largest iron and steel maker. It makes steel formed as billets, tubes, pipes, bars, and plates, and iron and tin products. Its markets include the appliance, auto, construction, oil, and shipbuilding industries, both in China and abroad. Baosteel has the capacity to produce close to 11 million tons of crude steel annually, although it produced only 7.5 million tons in 1999. Its metallurgical activities are supported by nearly 60 wholly-owned subsidiaries and affiliated companies, including operations in construction, finance, information technology, international trade, real estate, and transportation. It has marketing subsidiaries and affiliates in Brazil, France, Germany, Hong Kong, Japan, Russia, Singapore, South Africa and the United States. Its sales in 1999 topped $8.27 billion, an increase of 58.5 percent on the previous year. It has 14,539 employees worldwide. In recent years, the group has had to cope with absorbing several lossmaking steelmakers, as the government attempted to solve the problems of ailing state enterprises through a series of mergers and acquisitions. Baosteel became the mainland's biggest steel manufacturer in November 1999 with the formal absorption of Shanghai Meishan (Group) and Shanghai Metallurgical Holding (Group). The resulting conglomerate accounts for 20 percent of the national steel industry's fixed assets. Baosteel has a 55 percent share of China's auto steel plate market. Currently, the national demand for this sector is about 1.5 million tons a year. The Shanghai plant making these items attained QS9000 quality certification in an attempt to gain recognition from big-name auto producers. It currently supplies plates for Santana and Hongqi cars. It uses 238 kinds of steel plates in production of its Hongqi (Red Flag) car, accounting for 85.84 percent of the total. Last year, Baosteel exported, for the first time, 64 tons steel plates to South Korean automaker Daewoo. In March, Baosteel completed repairs on three fire-damaged furnaces which had interrupted production. An investigation concluded the February 28 fire was caused by a wiring fault under one of the furnace. Baosteel in July began trial runs on a cool-rolled steel facility capable of producing sheet metal (1,550 mm width) of high enough quality to supply international automakers. Baosteel has invested 8 billion yuan in the facility, which has an annual capacity of 1.4 million tons. The unit is the last big project in the group's three-phase expansion, and is not included in the overseas listing vehicle. The complex mainly produces high value-added products such as outer sheets for cars and home appliances as well as silicon steel. It aims to regain the domestic market share taken by Japanese and South Korean competitors, As part of the third phase of Baosteel 's expansion, the company is also building a new transit deep-water port for iron ore which will be the largest in the country, the Majishan ore-transit port. The first phase of the 250,000-ton-handling-capacity project includes a 250,000-ton unloading berth, a 35,000-ton loading dock, a 1.2-million-ton storage area, and other support facilities. The port will be built on Sijiao island in Zhejiang Province near Shanghai, where the steel complex is located China's steel industry Strongly bolstered by an increase in steel demand both on the home and international markets, and a steep price rise for steel products, the steel sector reported a 5.43 billion yuan profit in the January-June period of 2000. The whole-year profit is likely to reach 10 billion yuan. The steel sector's economic returns had been on the decline on a year-to-year basis since 1993, when the annual profit hit a record high of 29.4 billion yuan. China became the world's biggest steel producer in 1996, when its annual steel output exceeded 100 million tons. China mapped out a strategic plan to curb steel output and improve efficiency early in 1999. Steel prices began to pick up in the second quarter. The factory prices for construction-use products surged 300-500 yuan to hit 2,900-3,000 yuan per ton in its high sales period. The average steel prices had stabilized at a reasonable level of 2,400-2,500 yuan by June. In the first six months of 2000, China produced 61.18 million tons of steel, 3.45 percent more than in the corresponding period of 1999, but the growth rate dropped by five percentage points. However, China still has to import more than 7 million tons of 13 types of quality steel each year, including sheet steel, petroleum pipes, stainless steel, and steel from which to produce tools. Combined steel consumption nationwide is estimated at 132 million tons for the whole year. Over the past 10 years, the growth of steel demand in China has been averaging 10 percent per year on a compound basis, roughly in line with the expansion of the economy. Construction, including the commercial, industrial, and residential varieties, as well as that generally referred to as "public works", generates the largest component of China's steel market. China in March has issued new regulations forbidding industrial and commercial administrations at all levels from registering any new steel mill, regardless of the mill's form of ownership, in a step to controlling the nation's overall steel output. China will reduce its steel production in 2000 by 12 million tons. The government is encouraging steel companies to prepare themselves for other product lines and activities and central and local governments will aid mid-sized and large steel mills in shutting down their equipment and production lines. In a State Bureau of Metallurgical Industry survey conducted in early 2000, it was found that China's steel industry produced less than its capacity while also manufacturing inadequate amounts of needed steel products. The survey found that last year China had at least 290 steel plants with an overall capacity of 134 million tons of steel, while their actual output was 124 million tons. The survey also showed that China's many small steel makers, 46 plants with an annual output exceeding 500,000 tons, produced 84 percent of the country's steel, meaning that the country's remaining 244 small and medium-sized iron and steel mills produced only 16 percent of the national total. In addition, one quarter of China's steel is produced by technologically backward facilities, and another quarter is produced using domestic industry equipment standards. Despite the Chinese steel industry's excess capacity, the sector still cannot produce enough of certain types of steel while also manufacturing too much of other types, according to the survey. Because domestic steel output and quality are deficient, China has a shortage of high-grade steel and high-value-added products. Meanwhile, the survey found that China is manufacturing grossly excessive quantities of wire rods, screw-thread steel, mini-medium section bars, medium plate and welded tubes. China's annual steel consumption in 2000 will exceed 130 million tons and it will maintain a growth rate of about 3 percent. The implementation of China's west development strategy will strengthen the momentum of state investment in the west infrastructural construction, which will in turn create a vast market space for China's iron and steel industry. An annual steel consumption of over 20 million tons in the west for 2000 has been forecast, and the figure may increase to over 25 million tons by 2005. China's present production capacity of high-value-added steel products of premium quality, such as hot rolled and cold rolled sheet, galvanized sheet, stainless steel sheet and cold rolled silicon steel falls short of domestic demand. The quality of steel products, such as seamless tube, heavy rail, medium plate, alloy steel, small sections and wire rods all need to be improved. Iron ore for China's steel industry comes from two sources: domestic mines, many of which have been in production for years, and imported ore, principally from Australia, Brazil, and India. The domestic iron-ore supply is relatively low grade with an iron content of about 30 percent. By comparison, the imported ore has about a 60 percent iron content. (Special to Asia Times Online) |
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