A somewhat cagey ArcelorMittal has confirmed that it is in talks with China Oriental Group to increase its stake from the current 28 per cent. But it won’t discuss the price tag, mooted at $1.7bn. Such reticence is understandable given the need to tiptoe round the authorities in Beijing. Strictly speaking, restrictions on foreign ownership in the strategic steel industry would not apply because China Oriental is a Hong Kong-listed company registered in Bermuda. But were the steel giant to move ahead without approval, tacit or otherwise, it might jeopardise ArcelorMittal’s ambitions to increase its holding in the much larger state-controlled Hunan Valin business.

ArcelorMittal has a history of building for the long term from small initial stakes. While China Oriental’s 4m tonnes of production is only a 100th of Chinese output, it fits with ArcelorMittal’s strategy of expanding both geographically and into more lucrative products – the Chinese company makes mainly higher value H-beams. Ultimately it may provide a base to take part in the tidying-up of the fragmented Chinese steel industry. There are about 800 steelmakers in the country and the 10 largest control only a third of production. Official resistance to foreign ownership may also moderate eventually as Chinese manufacturers seek access to ArcelorMittal’s technical expertise in producing high-quality steel.

In the meantime, internal Chinese consolidation looks likely to be spurred by increased pain for its producers in the coming year. Sharply higher freight rates and higher export taxes have served to rein in the level of exports from April’s peak of 8m tonnes. Closure of small, inefficient and highly polluting steel plants by the government has helped to contain supply levels so far. But, without the export release valve as significant new capacity comes on stream, it will be tough for producers to pass on the coming raw material price increases. ArcelorMittal will then be waiting in the wings.

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