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Colin Liang
E-mail: [email protected]
Tel: +86-21-5155-0040Mobile: +86-13818344493
CBI Research & Consulting
Thoughts on the Chinese Steel Industry
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Slide 1
Outline
Who We Are and What We Do
Hot Topics in the Current Market
The Features of Chinese Steel Market - An Overview
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Slide 2
Who We Are
CBI China is the largest Chinese commodity research and consulting firm. We
specialize in the industry chains of: petrochemical, steel, oil & gas, non-ferrous metal,pulp & paper; providing our clients with real-time market intelligence and in-depth
industry value-chain analysis.
We aim to offer value driven consulting services and support our clients in making
strategic decisions on market entry, seeking business development opportunities
and market penetration here in China. Bringing together over 350 local
professionals, we have served over 73,000 multi-national and local clients withcustomized consulting and proven solutions since 1999.
Research &ConsultingServices
Information Services
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Slide 3
What We Do
Maintain a database containing 100,000+ companies, which iscontinually being updated.
Call directly to industry players to collect first-hand information and
monitor major industries throughout China.
Deliver more than 8,000 phone calls, 30,000 emails and 50,000 short
messages everyday to serve our 11,000 customers all over the world.
More than 350 full-time professionals are working in CBI, 20% with
Masters degrees and the rest with a minimum Bachelor degree. More
than 100 employees are bilingual.
We completed more than 100 projects and assignments for MNCs lastyear.
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Slide 4
Our Services and Products
Periodical Reports
China Steel Briefing
China Metal Briefing
Industrial Researches
China Steel Capacity Forecast 2007-2010
China Steel Demand Outlook 2007-2010
China Steel Production Cost Analysis
Customized Reports and Consulting Services
Conference Call and Customized China Tour
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Slide 5
Outline
Who We Are and What We Do
Hot Topics in the Current Market
The Features of Chinese Steel Market - An Overview
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The Features of Chinese Steel Market - An Overview
1. The Importance of the Chinese Steel Industry
3. Product Mix and Geographic Distribution of Steel Mills
2. Players and Their Relationship
4. Supply and Demand Dynamics
5. Export Evolution
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Data Source: International Iron and Steel Institute
1. The Importance of the Chinese Steel IndustryChina is The Major Driver of World Steel Production
17.7%
26.2%
15.0%
20.2%22.9%
31.0%33.8%
0
200
400
600
800
1,000
1,200
1,400
2000 2001 2002 2003 2004 2005 2006
Unit: Million tonnes
0%
5%
10%
15%
20%
25%
30%
35%
40%
China ROW China % of the World
Steel Production of China and the
World, 2000 - 2006
-2.9%
3.2% 3.6% 5.5%
-0.3%
4.4%
15.9%
21.9% 21.2%23.8%
29.2%
19.7%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
2001 2002 2003 2004 2005 2006
ROW China
Steel Production Growth Rate in China
and Rest of the World, 2001 - 2006
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2. Players and Their Relationship
Players in the Value Chain
CentralGovernment
LocalGovernment
Steel Mills TradersEnd
Users
CISA
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Goal: Smooth Growth with strategic long term planning
Lack of experience for the transition from Planning Economy to Market
Economy
Steep or flat learning curve?
Protect the interest of bigger Stated Owned Enterprises
Keep the steel price reasonable to downstream industries
Pollution control
Energy conservation
Industry consolidation
2. Players and Their Relationship
Central Government
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Social stability
GDP growth
Tax revenue
Employment
Other related industries
Different interest from central government
2. Players and Their Relationship
Local Government
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State owned enterprises:
The bigger, the better
Economy of scale
More clout to raw material suppliers, government, and competitors
Ownership
Top leaders are nominated by the government
Whom they are responsible to? Government, shareholders, employees, or clients?
Agency problem
Mentality of leaders: Top line vs Bottom line, Market Share vs Profit margin Whats their top priorities within their tenure? Capacity, production, profit, or
market share?
Game theory
What if I cut the capacity and production?
Sales & marketing strategies and channel management need to improve
Private mills:
Low-value added product Hit and run, small in scale
Not responsible to the government, CISA, National Bureau of Statistics, and publicshareholder
Strive to survive, maximize the profit
More self-disciplined in terms of capacity and production
2. Players and Their Relationship
Steel Mills
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Slide 12
Traders behavior adds more short term volatility to spot market price
Most small-medium size and private
Low entry barrier for speculative traders: financing, relationship with steel mills, few industry
knowledge, and guts
Little bargaining power to steel mills due to fragmentation
Provide financing and distribution services to steel mills and end users
Highly leverage on bank loan
First tier traders are highly speculative with small percentage of direct sales
Future trend
Economy of scale with consolidation
Distributors rather than speculators: service center
Compete on sound financing, distribution network, and JIT services
2. Players and Their Relationship
Traders or Distributors
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Slide 13
Large end users:
Direct orders from steel mills
JIT inventory control
Long-term contract with price lock-up
Middle size end users:
Order from traders Keep certain level of inventory
Purchase at spot market price
Get financing from traders with credit ranging from 15 to 30 days
Small size end users:
Orders from traders Few inventory
Purchase at spot market price
Get financing from traders with credit ranging from 15 to 30 days
2. Players and Their Relationship
End Users Purchasing Pattern
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Slide 14
3. Product MixFlat Production Is Catching Up Quickly
Data Source: NBS; CBI Research & Consulting.
Long
Products
61%
Flat
Products
26%
Others
13%
Long
Products
47.4%
Others
21%
Flat
Products31.6%
2001 Finished Steel ProductionTotal= 160.7 Million tonnes
2006 Finished Steel ProductionTotal= 469.5 Million tonnes
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Slide 15
3. Geographic Distribution of Steel MillsProximity to Resources, Ports and Markets
Steel Mills
Iron Ore
Coal
Data Source: CBI Research & Consulting, Google Earth
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Slide 16Data Source: NBS, CBI Research & Consulting.
4. Supply and Demand DynamicsProduction and Demand of Crude Steel
0
50
100
150
200
250300
350
400
450
2000 2001 2002 2003 2004 2005 2006
Unit:Million tonnes
0%
5%
10%
15%
20%
25%
30%
Production Demand Production GR Demand GR
Production and Demand of Crude Steel, 2000-2006
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Slide 17Data Source: NBS, CBI Research & Consulting.
4. Supply and Demand DynamicsGrowth Rates of Long Products and Flat Products
15.1%
19.2%
22.5%
13.5% 13.3%
13.8%
19.6%23.3%
19.7%18.1%
19.3%
23.2%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2001 2002 2003 2004 2005 2006Production Demand
Production and Demand Growth Rate of Steel Products, 2001- 2006
Long Products Flat Products
30.5%
35.1%
38.2%
9.6%
20.4%19.3%
11.7%
34.9%
21.0%
26.5%
23.9%
10.8%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2001 2002 2003 2004 2005 2006Production Demand
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Slide 18Data Source: CBI Research & Consulting.
4. Supply and Demand DynamicsRegional Supply and Demand in China, 2005
North-West
+1
21 20
North+42
113
71
East -29
127156
HAINAN
HEILONGJIANG
JILIN
LIAONING
HEBEI
SHANDONG
FUJIANJIANGXI
ANHUI
HEBEI
HUNAN
GUANGDONG
GUANGXI
SHANGHAI
HENAN
SHANXI
INNER MONGOLIA
SHAANXI
NINGXIA
GANSU
QINGHAI
SICHUAN
YUNNAN
TIBET
XINJIANG
JIANGSU
ZHEJIANG
BEIJING
TAIW
AN
GUIZHOUSouth-West18
1432
North-East
+8
39 31
Production
Demand
Middle and South
-958 67
Million tonnes
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Slide 19Data Source: China Customs, CBI Research & Consulting
5.Export EvolutionChina Exports & Imports by Destinations
China's Finished Steel Exports by
Destinations, 2004 - 2006
11.6%
12.3%
19.3% 20.4%
15.1%
9.1% 6.6%
17.4%
33.9% 34.5% 33.6%
24% 26.9% 21.6%
13.7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2005 2006
Others
EU
ASEAN
USA
Korea
14.2 20.5 43Total
Million tonnes
China's Finished Steel Imports by Origins,
2004 - 2006
17.2%
19.8%16.7% 18.9%
22.2%
8.0% 9.9%
3.0%31.9% 29.9%
17.1%
26.6% 24.2%
37.9%
16.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2005 2006
Others
Russia
Taiwan
Korea
Japan
29.3 25.8 18.5Total
Million tonnes
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Slide 20
5.Export EvolutionChanges in NetExports
Data Source: China Customs, CBI Research & Consulting
1.0 1.63.71.6
2.5
4.9
-1.9 -2.9
-8.8
-3.4-1.9
5.1
-5.2-6.8
-9.5
-6.2-6.8
-2.5
-0.7
-2.7
-1.6
0.4
3.3
-1.2
-1.9
-3.0
-2.1
-1.7
0.9
0.5
0.2 0.5
0.3
-0.2
0.4
0.0
-30
-25
-20
-15
-10
-5
0
5
10
15
20
2001 2002 2003 2004 2005 2006
Unit:Million tonnes
GIGIGIM-H PlateM-H PlateM-H Plate
CRCRCR
HRHRHR
Wire RodWire RodWire Rod
DeBarDeBarDeBar
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Slide 21
Outline
Who We Are and What We Do
Hot Topics in the Current Market
The Features of Chinese Steel Market - An Overview
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Slide 22
Hot Topics
1. When will the current oversupply end?
2. How strong will demand be in the future?
3. Will Chinese net exports continue to soar?
4. Potential impact of anti-dumping
5. Consolidation is on the way!
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Slide 23Data Source: CBI Research & Consulting.
1.When Will The Current Oversupply End?Crude Steel Capacity
535
601642 667
67218.9%
0.7%
3.9%
6.9%
12.3%
0
100
200
300
400
500
600
700
800
2006 2007E 2008E 2009E 2010E
Unit:Million tonnes
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Capacity Y-o-Y Growth Rate
Crude Steel Capacity, 2006 - 2010
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Slide 24Data Source: CBI Research & Consulting.
1.When Will The Current Oversupply End?Crude Steel Capacity by Products
364.8360.1
311.4
283.7
236.9
1.3%
15.7%
9.7%
19.8%
29.8%
0
50
100
150
200
250
300
350
400
2006 2007E 2008E 2009E 2010E
Million tonnes
0%
5%
10%
15%
20%
25%
30%
35%
40%
GI
Plate
CR
HR
Y-o-Y
GrowthRate
247.6245239.1230.9221.6
10.8%
1%
2.5%3.5%4.2%
0
50
100
150
200
250
300
350
400
2006 2007E 2008E 2009E 2010E
Million tonnes
0%
5%
10%
15%
20%
25%
30%
35%
40%
Wire Rod
DeBar
Y-o-YGrowthRate
Long Products Flat Products
2 H St Will D d B i Th F t ?
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Slide 25Data Source: CBI Research & Consulting.
2.How Strong Will Demand Be in The Future?
Steel Demand
375.4
448.7
520.6485
415.5
12.1%
7.3%
8.1%
8%
10.7%
0
100
200
300
400
500
600
2006 2007E 2008E 2009E 2010E
Unit:Million tonnes
0%
2%
4%
6%
8%
10%
12%
14%
Demand Y-o-Y Growth Rate
Steel Demand, 2006 - 2010
1 H St Will D d B i Th F t ?
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Slide 26
1.How Strong Will Demand Be in The Future?Main Steel Demand by Industries
Data Source: NBS; CBI Research & Consulting.
2010
Total=520.6
million tonnes
Hardware
3.6%
Pipes
1.4%
Shipbuilding
2.5%Container
1.0%
Home
Appliance
1.3%
Railway
1.3%
Automobile
6.2%
Machinery
15.8%Construction
48.5%
Others
18.5%
2006
Total=375.38
million tonnes
Others
21%
Hardware
4.1%
Pipes
1.6%
Shipbuilding
1.8% Container
1.1%
Home
Appliance
1.4%
Railway
1.0%
Automobile
4.3%
Machinery
13.4%
Construction
50.3%
3 Will Chi N t E t C ti t S ?
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Slide 27
3.Will Chinese Net Exports Continue to Soar?Steel Net Export Would Peak in 2009
Data Source: China Customs, CBI Research & Consulting
18.5
43
52.5
59.9
52.4
33.5
16 131314
2006 2007E 2008E 2009E 2010E
Unit: Million tonnes
Finished Export Finished Import
Finished Steel Import andExport, 2006 -2010
39.436.5
23.8
45.949%
-48%
-14.1%
25.8%
0
10
20
30
40
50
2007E 2008E 2009E 2010E
Unit:Million tonnes
-60%
-40%
-20%
0%
20%
40%
60%
Finished Net Export Y-o-Y Growth Rate
Finished Steel Net Export,2006 -2010
3 Will Chi N t E t C ti t S ?
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Slide 28
3.Will Chinese Net Exports Continue to Soar?Steel Export by Products
Data Source: China Customs, CBI Research & Consulting
180.2
209.7
228
226
206.6
17.6%
8.5%
-15.1%
-32.9%
0
5
10
15
20
25
30
2006 2007E 2008E 2009E 2010E
1000 tonnes
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
GI
Plate
CR
HR
Y-o-Y
GrowthRate
9.36
11.0111.9610.87
9.29
-24.1%
-10.0%
10.0%
17.0%
0
5
10
15
20
25
30
2006 2007E 2008E 2009E 2010E
million tonnes
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Wire Rod
DeBar
Y-o-YGrowthRate
Long Products Flat Products
4 A ti d i
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Slide 29Data Source: China Customs; CBI Research & Consulting.
4. Anti-dumping
China Doubled Its Share in Global Steel Trade in 2006
China
8%
China
15%
2005 2006
What impacts will anti-dumping activities have on Chinas steel export?
China Doubled Its Share in Global Steel Trade
4 Anti dumping
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Slide 30Data Source: China Customs; CBI Research & Consulting.
4. Anti-dumping
What Impacts Will Anti-dumping Activities Have on Chinas Steel Export
Oct
GI
Debar
WireRod
Pipe
Jan Feb Mar Apr May Jun Jul Aug Sep
-
USA
Mexico
Jan Feb Mar Apr May Jun Aug Sep
-
Thailand
Nov DEC Jan Feb
2006 2007
CR
CanadaUSA
USA
Mexico
Mexico
MexicoUSA
HR &M-H Plate
Indonesia Vietnam
Indonesia
India Australia
Countries Raised Anti-dumping Investigations onChinas Steel Export, Jan 2006 - Feb 2007
China Steel Export Quantities Under Anti-dumpingInvestigations, Jan 2006 - Jan 2007
0.7
1.4
0.1
0.8
0.3
0.1
3.8
0.1
4.0
5.8
4.3
3.1
14.8
6.4
CR
HR & M-H Plate
GI
Debar
Wire Rod
Pipe
Million tonnes
Export Quantities UnderAnti-dumping Investigation
Export Quantities UnderEU Anti-dumping Argument
Total China's Export Quantities
4 Anti dumping
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Slide 31
1. Chinese government have minimized Export VAT Refund and imposed
export taxes for semis
2. Flat product export will bear the brunt because of a larger share under
investigation.
3. Export to SE Asia could stop increasing due to more anti-dumping
investigations. E.U. and the Middle East are still promising for Chinas future
steel export.
4. Anti-dumping
What Impacts Will Anti-dumping Activities Have on Chinas Steel Export
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Slide 32
China's Export to ASEAN Going Flat
5.1
7.6
10.6
0
2
4
6
8
10
12
2004 2005 2006 2007E
Unit: Million tonnes
Source: China Customs, CBI Research & Consulting
China's Semi & Finished Export to ASEAN, 2004 - 2006
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Slide 33
China's Semi Export Can Hardly Feed ASEAN Shortage
4.2
3.6
2.6
5
9
7.1
6.1
?2007E
2006
2005
2004
Unit: Million tonnes China TotalSemi Export
China's Semi
Export toASEAN
Source: China Customs, CBI Research & Consulting
China's Total Semi Export & Export to ASEAN, 2004 - 2006
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Slide 34
China's Export to ASEAN by Products
Semi40%
Section
6%Wire Rod
2%
DeBar
12% Bars
5%
Sheets&
Coils
28%
Pipes
7%
43.5%
84.5%
72%
87%
0%10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Long Flat
Chinas Export to ASEAN
Chinas Total Export
Source: China Customs, CBI Research & Consulting
Chinas Export to ASEAN by Products, 2006 20042006 CAGR Rate for Chinas TotalExport and Export to ASEAN by Category
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Slide 35
China's Export to ASEAN Going Flat
5.1
7.6
10.6
0
2
4
6
8
10
12
2004 2005 2006 2007E
Unit: Million tonnes
Source: China Customs, CBI Research & Consulting
China's Semi & Finished Export to ASEAN, 2004 - 2006
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Slide 36
China's Semi Export Can Hardly Feed ASEAN Shortage
4.2
3.6
2.6
5
9
7.1
6.1
?2007E
2006
2005
2004
Unit: Million tonnes China TotalSemi Export
China's Semi
Export toASEAN
Source: China Customs, CBI Research & Consulting
China's Total Semi Export & Export to ASEAN, 2004 - 2006
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Slide 37
China's Export to ASEAN by Products
Semi
40%
Section
6%Wire Rod
2%
DeBar
12% Bars
5%
Sheets&
Coils
28%
Pipes
7%
43.5%
84.5%
72%
87%
0%10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Long Flat
Chinas Export to ASEAN
Chinas Total Export
Source: China Customs, CBI Research & Consulting
Chinas Export to ASEAN by Products, 2006 20042006 CAGR Rate for Chinas TotalExport and Export to ASEAN by Category
4 A ti d i
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Slide 38
4. Anti-dumpingVAT Refund Adjustment Chart Update
8%
11%
13%
15%
Jan, 20042000 Apr, 2005Sep,
2006
Finished Steel & Slab/billet
Slab & Billet
0%
Nov,
2006
Slab & Billet
Export VAT Refund and Export Tax Rate Evolutions, 2000- Apr 2007Export VAT Refund
and Export Tax Rate
-10%
Finished Steel &
Slab/billet
Finished
Steel
Apr,
2007
Pipes
Most of Flat Products
Part of Long Products
Most of Long Products
Part of Flat ProductsMostly
CR & GI
Most Finished
Steel Products
5%
Slab & Billet
Data Source: CBI Research & Consulting, NDRC
5 Consolidation
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Slide 39Data Source: NBS
5.Consolidation
Decreasing Concentration Ratio in the Past 6 Years
0
50
100
150
200
250
300
350
400
450
500
2001 2002 2003 2004 2005 2006
Unit:Million tonnes
25%
30%
35%
40%
45%
50%
Top 10 mill's Production Rest of Mills Production Top 10 Concentration Rate
Will capacity elimination really happen in China?
How much capacity will be eliminated?
Where will M & As go ?
A Deterioration in Chinas Top 10 Concentration Ratio, 2001-2006
5 Consolidation
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Slide 40
Elimination of Inefficient
Capacity
Pollution ControlCriteria on Size of
Equipment
Criteria on Energy
Consumption
Elimination of Inefficient
Equipment
Discriminatory Power
Pricing
Highly Polluting
Project Elimination
Policies :
Strong Normal WeakCurrent Impact
Progress Satisfactory Satisfactory Difficult
5.Consolidation
Will Capacity Elimination Really Happen in China?
5 Consolidation
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Slide 41
NDRC s Target: 100 million tons of iron-making and 55 million tons ofsteel-making capacity are requested to be eliminated by 2010, the 11th
Five-year Plan
Key Areas of Capacity Elimination: North China & East China
Conclusion:
Small but solid progress has been seen in key areas since end 2006.
Further strengthening measures are needed to approach the target.
5.Consolidation
How Much Capacity Will Be Eliminated by 2010?
Data Source: CBI Research & Consulting.
5 Consolidation
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Slide 42
Intra-Province Cross-Province
SOE with SOETanggang Group*
Magang with Hefei*
Baosteel with Bayi*
Baosteel with Jinan
SOE withPrivate
Tonghua I/S with Jilin Jianlong*
Hangzhou I/S with Ningbo Jianlong*
Private with
Private
Shagang with Huaigang*
Tangshan Guofeng with Yinfeng&Qunli*
Overseas MillsInvolved
Mittal with Valin*
Arcelor with Laiwu
Notes: 1. * refers to successful ones
2. Cases in red are self-initiated
3. SOE for state owned enterprises
Conclusions:1. More successful intra-province cases than cross-province ones
2. Private mills are taking more active roles in M&As
3. More waiting time for overseas acquirers
4. Catalysts: Market forces rather than government force
5.Consolidation
Where Will M & As Go ?
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Thank You!
Colin Liang
E-mail: [email protected]
Tel: +86-21-5155-0040Mobile: +86-13818344493
CBI Research & Consulting