Puzzling Grain-Steel State-owned Tie-up

A puzzling tie-up between COFCO and Baowu Steel--Chinese state-owned food-trading and steel-making behemoths--was featured at a signing ceremony for 11 collaborative agreements between 15 central state-owned companies and 5 local state-owned companies held October 31. Short English summary here.

The ceremony, held immediately after the conclusion of the 20th communist party congress, is apparently a signal that newly-minted dictator-for-life Xi Jinping has endorsed state-owned companies as the core of his approach to economic management. 

The chairman of the State-owned asset supervision committee presiding over the ceremony promised formation of new enterprises that would "serve the new requirements of national strategic goals." The description of the ceremony emphasized interconnections between state-owned companies, including plenty of language about "collaboration," "linkages," "integration," and "industry chains."

The tie-up between COFCO and Baowu Steel is puzzling since the companies' businesses do not seem to overlap at all. It's not obvious what synergy is possible.

COFCO is China's premier state-owned food conglomerate that includes assets in grain, cotton and sugar-trading, edible oil processing, corn manufacturing, flour- and rice-milling, biofuels, milk, pork, wine, an e-commerce platform, and a joint venture with Coca Cola. Baowu Steel is a giant steel-maker based in Shanghai, a place that has virtually no agriculture.

COFCO has a history of absorbing other state-owned companies in cotton-trading, animal husbandry, and grain logistics in recent years. The party's decision to ramp up farm commodity imports in 2020 was a license to print money for COFCO since it controls most of the import quotas for grains, cotton, and sugar, allowing it to import at world prices and resell at high prices in China. 

Baowu Steel has a history of taking over under-performing steel companies from all over the country. In 2016, Shanghai's Baoshan Steel absorbed Wuhan Iron and Steel to become Baowu. Ten years ago Wuhan Iron and Steel famously made its own weird announcement that it was starting up a pig-farming venture.

COFCO's party secretary and chairman's comments about the "strategic cooperation" with Baowu Steel were limited to vague jargon about "professional integration projects," and "optimizing resource allocation." His promise to "focus on the core business of grain, oil, sugar, cotton, meat, and milk" seems at odds with this cooperation with a company that has absolutely nothing to do with these core businesses. Baowu Steel's party secretary/chairman spouted similar meaningless jargon about "integration."  

A different version of the article contained similarly vague jargon about "synergy", "joint development force," "industrial ecosystem," "low-carbon," "green" to build a world-class enterprise through the COFCO-Baowu collaboration.

A collaboration between China Rare Earth Group and Rising Holdings Group announced at the October 31 ceremony made more sense. Another strategy featured was integration of central-government-owned companies like Aviation Industry Group with provincial or local companies like Shenyang Aviation Industry Group (to focus on intelligent manufacturing). Another agricultural tie-up featured Yunnan Province's State Farm Group and China Southern Power Grid, also described as a model of "integration of central and provincial governments." 

The article on the October 31 signing ceremony quoted a report from the just-completed Party Congress promising to "deepen the reform of state-owned companies" to make state-owned enterprises bigger and stronger. The asset commission chairman said the 20th Party Congress had given state-owned enterprises new missions and tasks, including a focus on "strategic security, industrial leadership, national economy, peoples' livelihood, and public services" to serve national strategic goals. He reiterated the mantra of focusing on the core business.

Another official commenting on the ceremony said the main goal for upcoming state-owned enterprise reform is to establish a dominant position in the relevant industry chain. 

An essay on state-owned enterprise reform posted on COFCO's web site in September promised to focus on core business and highlighted the company's jettisoning of non-core businesses (like hotels and golf courses). 

The ascendance of COFCO was evident in state news media coverage of last week's 5th Shanghai Import Expo. Its eagerness to make purchase deals with other countries at the expo was played up by describing COFCO as the "world's shopping cart." COFCO promised to use the expo to make friends up and down the supply chain and to diversify China's imports. China Daily said COFCO signed $10 billion worth of purchase agreements with foreign partners at the November 5-11 expo in Shanghai. COFCO also reported an agreement with the U.S. Soybean Export Council to establish a Collaborative Soybean Innovation Center was signed at the expo.

No rationale was given for the link-up between COFCO and Baowu Steel. A link to the state media article on the agreement is the only mention of the deal evident on the COFCO web site.

Perhaps Baowu wants to take advantage of COFCO's port and logistics facilities acquired in its purchase of grain traders Nidera and Noble Agri six years ago to import raw materials. Or maybe the apparatchiks controlling one of the two companies are too closely affiliated with one of the communist party factions that are Xi's enemies and need to be watched carefully.