CITIC/Nanjing I&S: Beijing forges tighter bonds to steel supply chain

Nothing symbolises Chinese national industrial power more potently than steel. That is one reason why the Chinese state is indirectly taking a controlling stake in the country’s top speciality steel producer via a $2bn deal. The second reason is the long-term commercial opportunity presented by the automotive industry.

State-owned conglomerate CITIC outbid private sector rivals for 55 per cent of Nanjing Iron & Steel Group. It is making the investment via subsidiary Xinye, which is spending Rmb13.6bn ($2bn) on securities issued by Nanjing. Xinye trumped aggressive bids from top private steelmaker Jiangsu Shagang Group. 

Speciality steel is crucial to car production. Manufacturers vary the recipe for the metal to improve characteristics such as heat resistance and corrosion resistance. They can command good margins.

China’s steel sector has been weak, however. Many mills have lost money amid fierce competition, rising inventory levels and high input costs. Iron ore prices are expected to drop nearly a third by the end of this year. A prolonged property market downturn has depressed demand.

But the outlook for Chinese auto sales has been improving. Production expanded 13.5 per cent to nearly 2mn units in February. Nanjing’s shares reflect expectations those numbers will rise further. The shares have jumped more than 40 per cent in six months. At 9 times forward earnings, they trade at a premium to regional steelmakers.

China is the world’s biggest producer and consumer of steel. Beijing wants more control over an industry where global mining groups such as BHP have strong sway. It has already deployed state-run entity China Mineral Resources Group to centralise all iron ore purchases for the country.

The Nanjing deal therefore extends state influence in the steel sector. CITIC will be able to intervene in the supply chain of the local auto industry. Politics is about to play a bigger part in input costs for cars, alongside supply and demand.