China has called for a consolidation in the fragmented steel industry for years but so far most major tie ups have occurred within one province and were directed by local governments and many merger proposals have been shot down. Restructurings to date have mainly been driven by provincial governments through the free transfer of state owned stakes.

A report from Fitch Rating said that Chinese government’s efforts to improve the competitiveness of its steel industry may be thwarted as many merger proposals in the sector have been directed by provincial governments rather than the mills themselves. It said that the provincial government driven M&A activities will prolong the industry rationalization and delay improvements in overall competitiveness and efficiency.

Mr Danny Chen associate director of Fitch Corporate ratings team in Beijing said that “This is because many Chinese mills are subject to the oversight of local governments, which often have a vested interest in maintaining their influence on key industries and protecting a lucrative source of income tax revenue. Although state managed M&As provide more flexibility and cushion for domestic steelmakers to reorganize themselves, doubts remain about the success of these administrative measures in China's increasingly diversified economy.”

Some other acquisitions between different provinces are merely viewed as strategic tie ups to achieve stronger bargaining power for raw materials and product distribution. Such strategic tie ups have in fact contributed little towards rationalizing the industry structure or strengthening China's bargaining power in acquiring raw materials overseas. Fitch said that the link ups may not motivate mills to really integrate their businesses and management, resulting in few consolidation benefits and little improvement in efficiency, and consequently prolonging the consolidation process.

Fitch said that more substantial market driven asset consolidation in the sector is required to reinforce an industry wide rationalization and to enhance participants' competitiveness with global peers.