China Steel Has No Plans to Sell Stakes to Mainland Rivals

By Yu-huay Sun

May 7 (Bloomberg) -- China Steel Corp., Taiwan’s biggest steel mill, has no plans to sell stakes to mainland Chinese rivals after cross-straits investment rules eased, a company executive said.

China from May 1 allowed investments in Taiwan’s industries, as part of plans to foster more cross-border business ties. China Steel has gained 11 percent since the announcement on speculation rivals including Baosteel Group Corp., the mainland’s largest steelmaker, will expand overseas to counter slowing demand and lower prices at home.

“We don’t need the money,” Executive Vice President Chung Le-min said in a telephone interview. “Some investment bankers have approached us in the past for possible cross-shareholdings with mainland Chinese steelmakers, wanting to earn commissions of 3 percent, 5 percent. ‘It won’t happen,’ we already said.”

China Steel, which posted a first-quarter loss of NT$7.18 billion ($216 million), has dropped 44 percent in the past year to NT$26.60 a share, giving it a market value of NT$334 billion.

The Kaohsiung-based mill, which makes half of the alloy used in Taiwan, isn’t in talks to sell shares to Chinese rivals, Chung said. The Taiwanese government, which owns 21 percent, would probably want to retain control of the only steelmaker owning blast furnaces in the island, he said. The share price decline also meant any sale won’t be seen as attractive, he said.

“Baosteel and domestic mills would pay more attention to the acquisition of resource companies than buying an overseas rival now because the steel market is weak,” said Zheng Dong, a Beijing-based analyst at Guosen Securities Co.

Investment Plans

China Steel had NT$2.59 billion in cash as of the end of March, and NT$113 billion in liabilities. The mill is planning NT$24 billion of capital expenditure this year, Chung said.

The company has no need for an external cash infusion as it is planning to sell NT$30 billion of bonds, as previously announced, and has $2 billion of bank credit available, he said.

“Our focus now is the expansion of the Dragon Steel unit and we don’t have any other plans,” Chung said.

Dragon Steel Corp. expects to complete construction of a 2.5 million-ton-a-year blast furnace before the end of the year, he said.

Aluminum Corp. of China is leading Chinese companies in a resource acquisition spree of at least $21 billion this year, investing in debt-laden commodity producers including Rio Tinto Group. Anshan Iron & Steel Group and Hunan Valin Iron & Steel Group are buying stakes in iron ore producers in Australia, securing supplies of the steelmaking ingredient.

No ‘Current’ Plans

Shanghai-based Baoshan Iron & Steel Co., the listed unit of Baosteel Group, doesn’t have “current investment plans” in China Steel, Vice President Chen Ying said in a phone interview.

“China Steel is excellent in management and technology,” Chen said. “Our cooperation so far is limited to technology.”

The two companies have allied on environmental protection, plant efficiencies and computer setups. China Steel’s Chung and Baoshan’s Chen didn’t provide more details.

Standard & Poor’s Ratings Services on May 5 cut the credit outlook for Baosteel and Baoshan to “negative” from “stable” on concern overcapacity in China would hurt earnings. Baosteel has 5.57 billion yuan ($816 million) in cash and 79.67 billion yuan in unused bank facilities, against 28.95 billion yuan of debt due in 12 months, the ratings company said.

Executives of Sinosteel Corp., China’s second-largest iron- ore trader, will visit Taiwanese companies including China Steel this month, Sinosteel spokesman Li Kejie said May 4. Li declined to comment on investment plans.

Improving Ties

Ties between China and Taiwan have improved since the Kuomintang party’s Ma Ying-jeou took office a year ago as the island’s president and dropped the pro-independence stance of his predecessor Chen Shui-bian. While China says Taiwan is part of its territory, the two have been administered separately since 1949.

China Mobile Ltd. on April 29 agreed to buy a stake in Far EasTone Telecommunications Co., the first investment by a Chinese state-owned company on the island since a civil war ended six decades ago. Taiwan and China signed an agreement on April 26, allowing mainland Chinese investment in Taiwan.

The Taiwan cabinet is set to consider opening up 65 industries, including the auto sector, to mainland investors within two months, Fan Liang-tung, executive secretary at the Investment Commission, said May 6.

“It’s companies that may create synergy that’ll be targeted, for example competitors, or suppliers and customers,” Ernest Chiang, who manages NT$2 billion for IBT Asset Management Co., said in Taipei. “The mainland’s steel companies may be buying shares in China Steel.”

Still, losses at Chinese mills may preclude any overseas investments. China’s steel industry posted an aggregate first- quarter loss of 3.3 billion yuan as prices plunged to 1994 levels, the China Iron and Steel Association said last month.

“Because the market is very weak, I don’t think Baosteel and other domestic mills have time and money to consider acquisitions in Taiwan,” Guosen’s Zheng said.

To contact the reporter for this story: Yu-huay Sun in Taipei ysun7@bloomberg.net.