It looks like consolidation of the steel industry is back on the agenda at the Ministry of Industry and Information Technology (MIIT), but not for the reasons one might think. The MIIT announced earlier this month that it wants to create a Chinese version of the world’s largest steel company, ArcelorMittal. This is not another attempt by the ministry to deal with overcapacity, but rather is meant to give it an edge in negotiations with both raw material suppliers and customers. The proposal sounds a lot like the China Iron and Steel Association’s suggestion during the 2009 iron ore negotiations with Rio Tinto, BHP Billiton and Vale that China, as the Big Three miners’ largest Asian customer, should receive large discounts.
That argument didn’t work then, forcing steel companies to buy their iron ore at higher prices on the spot market, and the MIIT’s attempt to create a national champion steel company won’t work now. With tight supplies of iron ore expected to continue for the next two to three years, the negotiating power is in the hands of the miners, making a price rise likely. Even if the MIIT can consolidate enough mills to create a national giant, it will be hard pressed to secure a bargain.
The ministry might find more success by waiting two or three years, by which time many second-tier overseas iron ore mine projects – many of which have received Chinese investment – will be operational. Stronger iron ore supplies will help to boost the negotiating power of Chinese steel mills, increasing the likelihood that a Chinese national champion steel company could have an impact on the market.
But the MIIT will have to do more than please the international miners: It will also have to get its proposal past domestic stakeholders, most importantly local governments and the steelworkers themselves. Consolidating mills will inevitably result in mill closures as outdated capacity is removed and production streamlined. That will mean a loss of tax revenues and employment at the local level; it could also eliminate social services and public utilities for remote communities that play host to mills.
Local governments won’t simply accept these losses, and are one reason why the MIIT’s attempts to reduce steel overcapacity haven’t worked in the past. The ministry has also been stymied by smaller mills joining together to form large “in-name-only” groups, and by simple disobedience: Mills forced to merge have frequently continued to operate as separate units, acting as if a merger had never happened. MIIT officials shouldn’t think that this time will be any different.
A solution for the MIIT may be to offer compensation to local governments and employees in areas where mills are closed. Whether this comes in the form of transfer payments from the central government, finding jobs for laid-off workers or some other solution is up to the ministry.
What is important is that some form of compensation is given. Consolidation that removes essential social services from remote areas by shutting local steel mills is incompatible with Beijing’s claim that it is building a harmonious society, and will meet the same fate as past failed efforts. Once the MIIT has worked out how to maintain these services, it can consider merging mills together – but not before then.