China's Sangang buys steel capacity with eye toward bolstering output

China’s government-backed Fujian Sangang Group purchased iron- and steel-making capacity from a bankrupt plant in western China, the company said on Monday, allowing the company to expand its own capacity later.

The purchase is part of a growing trend, implicitly backed by China’s government, of swapping steel capacity between the country’s regions to foster consolidation in the industry and to reduce the concentration of factories to cut back air pollution in its industrial heartlands.

Fujian Sangang will pay 1.81 billion yuan ($260.71 million) for 1.22 million tonnes of iron-making and 1.35 million tonnes of steel-making capacity located at a plant owned by Laiwu Steel Co in China’s northwestern province of Xinjiang, the company said. Laiwu is a subsidiary of state-owned Shandong Iron and Steel Group.

Sangang won the capacity for the plant, which is under bankruptcy proceedings, in an auction at a local government-backed property right exchange center. The capacity had a floor price of 640 million yuan.

“(The capacity purchase) has necessity and feasibility. It will benefit the future production and operation of the company, and will lay a firm foundation of the company’s long term growth,” said Sangang Minguang in response to investor inquiries on a website run by the Shenzhen Stock Exchange.

The Laiwu capacity is located more than 5,000 km (3,100 miles) from Sangang’s headquarters in Fujian province in China’s southeast.

The deal reflects the rising trend of cross-region steel capacity trade in the world’s top steel producer. China has tried to reform its steel sector by reducing excess and outdated capacity while banning new capacity in some areas.

At least 14 regions and provinces in China, including the top five steelmaking hubs of Hebei, Jiangsu, Shandong, Shanxi and Liaoning, will not be encouraged to accept iron and steel producing capacity from other regions, according to a statement issued by the industry ministry on Nov. 15.

Xinjiang has also been discouraged from adding new capacity but Fujian is exempt from the restriction.

Sangang said on the website run by the Shenzhen Exchange that it was still studying how it would use the Laiwu capacity. It currently has 11 million tonnes of steelmaking capacity at four plants.