China combines 2 steel makers as demand surges

BEIJING (AP) — Two Chinese steel companies combined Monday to form the world's fifth-largest producer, the latest in a series of government-orchestrated deals aimed at creating globally competitive suppliers amid booming demand.

The new state-owned company was formed through a combination of Tangshan Iron & Steel Group and Handan Iron & Steel Group. It is called Hebei Iron and Steel Group Co. and replaces Baosteel Group Co. as China's biggest steel company.

China is the world's biggest steel producer and consumer but many of its mills are dirty and inefficient. The government is trying to promote efficiency through consolidation and hopes bigger producers can strike better deals with foreign iron ore suppliers at a time of record prices.

"The new group is officially set up today," said Wang Yanjun, a Tangsteel spokesman. He said it would be based in the northern city of Shijiazhuang in Hebei province, which encircles Beijing.

Tangsteel's steel output last year was 22.75 million tons, while that of Hansteel was 9 million, according to the Chinese financial press. Their combined total would rank fifth worldwide after South Korea's Posco, which produced 32.8 million tons. Baosteel's 2007 output was 28.6 million tons.

China's steel boom has been driven by explosive growth in demand from export-driven manufacturing industries, a surge in Chinese auto ownership and a domestic building boom in dozens of cities.

China has a half-dozen competitors among the world's top 20 steel producers, according to Metal Bulletin, an industry consultant. The world's biggest steel producer is Luxembourg-based ArcelorMittal SA, with output of 116.4 million tons last year.

Hebei Steel hopes to raise its annual output to 50 million tons by 2010, Tangshan said on its Web site.

An earlier report by the government's Xinhua News Agency said the Hebei merger was meant in part to head off possible takeover attempts by other Chinese producers such as Baosteel or Beijing's Shougang Group.

Chinese mills have been squeezed by record global prices for iron ore.

They have banded together to negotiate with iron ore suppliers. But despite that tactic, mills led by Baosteel were forced to agree last week to a 96.5 percent price hike for 2008 with Rio Tinto PLC, one of three major suppliers. They agreed in February to a 65 percent price hike with Brazil's Companhia Vale do Rio Doce SA.

Shares in China's steel producers slumped on the country's stock markets on worries the high raw material prices would hurt earnings.

Regulators have been shutting down smaller, dirtier steel producers in order to reduce the industry's environmental impact and Beijing has imposed curbs on steel exports to conserve energy.