[THE INVESTOR] The merger of two Chinese state-run steelmakers may bring short-term benefits to POSCO and other Korean mills, but could pose a long-term threat, analysts said on June 29.

Shanghai Baosteel Group and Wuhan Iron & Steel Group are reportedly in talks on a merger, which would create a company with an annual capacity of 61 million tons. Currently, ArcelorMittal is the top industry player with 114 million tons.

The merged entity’s capacity would far exceed that of POSCO, Korea’s top steelmaker and the No. 4 player in the world.

Last year, POSCO’s capacity stood at 42 million tons.

Local analysts said the expected merger may come as a blessing in disguise for Korean players in the short term because it mirrors China’s intention to address the issue of oversupply rather than tap deeper into the world market with cheap products.

“China is likely to reduce overcapacity more effectively through a merger or a production cut, which could drive up the price of Chinese steel products,” Hana Financial Investment Co. said in a note to clients on June 28. “It may have a positive impact on POSCO’s exports and its share price.”

Global steel mills have criticized China’s steel industry for churning out more steel than it needs and exporting the surplus at prices they can‘t match. Last year, China exported cheap steel products to the tune of 112 million tons, roiling the global market.

Since late last year, Beijing has been pushing for a sweeping overhaul of its steel sector to resolve the issue of excess capacity. Recently, China’s National Development and Reform Commission announced a plan to cut the country’s steel output by 45 million tons and lay off 180,000 workers.

In a research note, Korea Investment & Securities Co. said the merger talks are meaningful in that China’s restructuring of its overblown steel industry may become a reality unlike in the past.

“It could give China’s midsized mills more leverage in price negotiations, which would mark up prices,” the company said.

Shim Sang-hyeong, chief researcher at POSCO Research Institute, echoed the view.

“The world steel industry would restore its stable order once the two Chinese firms are merged and China’s restructuring efforts produce tangible results,” the economist said. “In addition, there is a possibility that steel prices may rebound after faltering in the couple of months following an upturn.”

Over the long haul, however, the merger of Baosteel and Wuhan may come as a burden to Korean steelmakers should it create synergy and thus boost the competitiveness of its products, Shim said.

Baosteel enjoys some 50 percent share of China’s market for lucrative automotive steel, and Wuhan is known to be highly competitive in general steel products.

(theinvestor@heraldcorp.com)