Bloomberg News

Baosteel Should Study Tata's Corus Buy, Deloitte Says

November 01, 2006

Baosteel Group Corp., China's biggest steelmaker, would do well to study Tata Steel Ltd.'s $8 billion purchase of Corus Group Plc. if it wants to expand through takeovers in China and overseas, Deloitte Touche Tohmatsu says.

``China will be a major player as an acquirer of other steelworks around the world'' after its domestic consolidation, Nicholas J. Sowar, global steel industry leader at Deloitte, said in an interview in Shanghai today. Deloitte is the world's second-largest accounting firm.

Steelmakers worldwide are buying one another to exercise greater control over costs and gain access to new markets. The Chinese government announced policies in July 2005 to encourage its 260 steelmakers, which may not yet be taken over by overseas companies, to merge with one another to form bigger groups.

Mumbai-based Tata Steel needs to enter the western European market, and would enhance its research capabilities by buying London-based Corus, Sowar said. Tata Steel, which was only one- fourth the size of Corus, has lower production costs than the company it bought last month, and access to rich iron ore resources, he said.

Consolidation in China may reduce the number of major steelmakers to 10 mills, with Baosteel likely to take the lead, Sowar said. Baosteel should consider access to raw materials, including iron ore, gaining new customers, and technology integration when selecting takeover targets, he said.

Largest Steelmaker

Mittal Steel Co., the world's largest steelmaker, agreed to purchase Arcelor SA, its nearest rival, in July for $38 billion. The combined company, known as Arcelor Mittal, controls 10 percent of global production.

China's government has announced several measures aimed at speeding up the closure of small and highly polluting mills by cutting export incentives on low-end steel products and limiting the supply of iron ore to smaller mills.

Removing inefficient steel production capacity will help Chinese and global steelmakers in their annual negotiations over iron ore prices with major suppliers, Sowar said.

Still, iron ore prices will have a modest rise next year because of the growth in demand for the commodity, particularly in Brazil, Russia, Asia and India, he said.

Ore prices have risen for four straight years, with a 19 percent gain this year to a record. Talks for 2007 contract prices between China's major steelmakers and suppliers including BHP Billiton, Rio Tinto Group and Cia. Vale do Rio Doce will start this month.

To contact the reporter for this story: Helen Yuan in Shanghai at hyuan@bloomberg.net

To contact the editor responsible for this story: James Poole in Singapore at jpoole4@bloomberg.net


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