Nothing symbolises Chinese language nationwide industrial energy extra potently than metal. That’s one motive why the Chinese language state is not directly taking a controlling stake within the nation’s high speciality metal producer by way of a $2bn deal. The second motive is the long-term industrial alternative introduced by the automotive business.
State-owned conglomerate CITIC outbid non-public sector rivals for 55 per cent of Nanjing Iron & Metal Group. It’s making the funding by way of subsidiary Xinye, which is spending Rmb13.6bn ($2bn) on securities issued by Nanjing. Xinye trumped aggressive bids from high non-public steelmaker Jiangsu Shagang Group.
Speciality metal is essential to automotive manufacturing. Producers fluctuate the recipe for the metallic to enhance traits equivalent to warmth resistance and corrosion resistance. They’ll command good margins.
China’s metal sector has been weak, nevertheless. Many mills have misplaced cash amid fierce competitors, rising stock ranges and excessive enter prices. Iron ore costs are anticipated to drop practically a 3rd by the top of this yr. A chronic property market downturn has depressed demand.
However the outlook for Chinese language auto gross sales has been bettering. Manufacturing expanded 13.5 per cent to almost 2mn items in February. Nanjing’s shares mirror expectations these numbers will rise additional. The shares have jumped greater than 40 per cent in six months. At 9 instances ahead earnings, they commerce at a premium to regional steelmakers.
China is the world’s greatest producer and shopper of metal. Beijing needs extra management over an business the place international mining teams equivalent to BHP have robust sway. It has already deployed state-run entity China Mineral Assets Group to centralise all iron ore purchases for the nation.
The Nanjing deal due to this fact extends state affect within the metal sector. CITIC will be capable to intervene within the provide chain of the native auto business. Politics is about to play a much bigger half in enter prices for automobiles, alongside provide and demand.
If you’re a subscriber and want to obtain alerts when Lex articles are printed, simply click on the button “Add to myFT”, which seems on the high of this web page above the headline.