Shandong Iron to Buy Two-Thirds Stake in Rizhao Steel, FT Says

By Bloomberg News

Aug. 26 (Bloomberg) -- Shandong Iron & Steel Group, China’s sixth-largest steelmaker, will likely buy two-thirds of closely held Rizhao Iron & Steel, the Financial Times reported, citing people familiar with the matter and Chinese media reports.

Shandong Steel will inject 16 billion yuan ($2.3 billion) of new capital into Rizhao in exchange for the stake, the FT reported. The hostile takeover may be completed as early as next week, the newspaper said. Shandong Steel and Rizhao are both based in Shandong province in the country’s east.

China Premier Wen Jiabao said the steel industry should accelerate consolidation, and that it must weed out obsolete capacity, according to an official Xinhua News Agency report on July 6. Earnings at the nation’s steel mills are starting to recover, helped by a 4 trillion yuan ($586 billion) stimulus package, after a seven-month run of losses.

“China needs to consolidate the industry to boost its bargaining power for both raw materials and its products,” said Li Xinchuang, executive vice president of the China Metallurgical Industrial Planning and Research Institute, a government adviser. “All the problems that China’s steel industry face are stemming from its fragmentation.”

Du Shuanghua, Rizhao’s majority owner and China’s second- richest man last year, has fought to avoid losing his company to Shandong Steel, a newly formed group controlled by the Shandong provincial government, the report said.

Du attempted to block the takeover by handing as much as 30 percent of Rizhao’s shares at a low valuation to Kai Yuan Holdings Ltd., a Hong Kong-listed company, according to people familiar with the transaction and Hong Kong media reports, the FT said. Kai Yuan, up almost threefold this year, fell 2.4 percent to 40.5 HK cents as of 11 a.m. in Hong Kong today.

No Approvals

“Rizhao Steel, founded in 2003, hasn’t got environmental or any other approvals for its steel works from the central government,” Li said. “A takeover by state-owned Shandong Steel would help Rizhao get official approvals.”

A man in Shandong Steel’s Communist Party department, which is in charge of media inquiries, said he had no information related to Rizhao. He declined to give his name. An official at the Shandong provincial government said he couldn’t immediately make a comment on the report. Kai Yuan’s company secretary Raymond Yip couldn’t be reached for immediate comment.

Wang Lifei, vice president of Rizhao Steel in Rizhao city, couldn’t be immediately reached on his mobile phone.

Steel Losses

China, the world’s largest steel producer, reported 71 of its largest mills posted a combined profit of 3.55 billion yuan ($520 million) in June, the second monthly gain after seven months of losses, according to the Ministry of Industry and Information Technology.

Jinan city-based Shandong has two units, Laiwu Steel Corp. and Jinan Iron & Steel Co., listed in Shanghai. Laiwu fell 2.5 percent to 11.42 yuan as of 11:04 a.m. local time today, and Jinan rose 1.7 percent to 5.89 yuan.

The China Business News reported on Aug. 20 that Shandong Iron and Rizhao may sign an agreement relating to cross- shareholdings on Aug. 25. Rizhao posted a “good” profit in the first half, while Shandong Steel had a loss of 1.29 billion yuan, the report said. The Shandong provincial government plans to build a steel plant with an annual capacity of 20 million metric tons in Rizhao city, the report said.

--Helen Yuan, Madelene Pearson, with assistance from Theresa Tang in Hong Kong. Editors: Teo Chian Wei, Andrew Hobbs.

To contact the reporters on this story: Helen Yuan in Shanghai at hyuan@bloomberg.net; Madelene Pearson in Melbourne on mpearson1@bloomberg.net.