Rising costs, declining profits and nationwide overcapacity are pushing two of China's largest steelmakers towards a government-arranged merger, according to deputies now meeting in Beijing at the annual National People's Congress meeting.
The companies, based in Liaoning, are Anshan Iron & Steel Group, or Ansteel, a producer of 30 million tonnes of steel last year, and Benxi Iron and Steel Group, which produced 10 million tonnes.
Wang Min, head of the Communist Party provincial committee, said the State-owned Assets Supervision and Administration Commission had set up a work group, headed by vice-minister Shao Ning, to oversee consolidation of the two listed steelmakers.
This would be their 'last opportunity' to merge, said Zhang Xiaogang, who is Ansteel general manager and also a deputy to the NPC, as market conditions may not favour a merger in the future. He said consolidation in steel was inevitable now that China produced 640 million tonnes of steel last year, almost half of the world's total output.
To cope with the rising price of iron ore and transport, and the depressed price of general steel products, the two steelmakers needed to combine advantages, Zhang said.
Sending products to the south was no longer as profitable, he said, because of rising costs and competitors' newly built production operations near those traditional markets - such as those run by Baoshan Iron & Steel and Wuhan Iron & Steel.
Wang, who is also provincial party secretary, said the imminent merger would give full play to Ansteel's advantage as a supplier to the railway industry, and Banxi's advantage as a supplier to the car industry.
Ansteel has also been a leader in Chinese industry's 'go-out' campaign, to invest abroad.
It signed an agreement with US Steel Development last year to set up a joint venture in Amory, Mississippi. The deal had run into political opposition when a bipartisan group of 50 United States legislators called for an investigation, alleging the deal would threaten American jobs and security. But there was no political barrier now, Ansteel's Zhang said.
Aiming also to extend its value chain, Ansteel formed a joint venture in London with British Stemcor, an international steel trader, to invest in steel-related services.
In the future, Zhang said, Ansteel would consider investing in nickel and chromium mines overseas.
Liaoning used to be part of China's heavy industry base in the era of the more fully planned economy, which was called the 'rust belt' about 10 years ago.
But today, through building new industries and closing old ones, the province had become the seventh-largest economy among the provinces, with a gross domestic product amounting to 1.8 trillion yuan (HK$2.1 trillion) last year, said provincial governor Chen Zhenggao .
But the making of quality steel, to be led by the reformed Ansteel, would continue to be one of Liaoning's pillar industries, he said.
China produced 640 million tonnes of steel last year
That as a percentage of the world's total output was nearly: 50%