JINAN: East China's Shandong Province plans to restructure its two largest steel companies into one corporation with an annual production capacity surpassing 30 million tons.

"The preliminary idea is to establish an investment holding company with the two companies Laiwu Steel and Jinan Steel subordinate to it," said Ma Qingjun, an official with the Shandong Land and Resources Department.

"A new steel company under the holding company with a designed yearly output of more than 11 million tons will probably be constructed in the nearby Rizhao City afterwards. All the production standards in this new plant will be facilitated according to world levels."

"Restructuring steel enterprises is a global trend to consolidate the steel sector, and the Chinese Government also encourages such mergers," Ma told China Daily yesterday, adding that the details are still being negotiated.

Jinan Steel, in Shandong's capital Jinan, and Laiwu Steel, in the central Laiwu city, have established themselves as major players in the steelmaking sector. The two ranked No 6 and No 7 in China last year with an output of 10.42 million and 10.34 million tons of steel respectively. Jinan Steel is also the largest steel plates manufacturer and exporter in China.

Their combined production capacity would be close to China's No 1 steelmaker Shanghai Baosteel, which had a production output of 22.73 million tons last year.

According to China's Steel Industry Development Policy released in July 2005, by 2010 the country would see two globally competitive steel companies with an annual production output of 30 million tons each. To date all the major steel companies have set their target output to that amount.

The quantity of steel companies will be greatly reduced but the top 10 steel companies are expected to cover 50 per cent of the country's total output by 2010, then to 70 per cent in 2020.

"Eliminating small steel projects with backward production capacity and restructuring the large ones are both taking centre stage this year in efforts to build a healthy and competitive steel industry," said Luo Bingsheng, vice-chairman of the China Iron and Steel Association.

"By way of mergers and restructuring, China may combine many large-scale steel companies that have modern production lines to produce technology-intensive and high value-added steel products," he said.

Under the guidance of macro policies and the pressure of the international market, domestic steel companies have accelerated the pace of mergers and restructuring: Baosteel joined with Ma'anshan Steel; Capital Steel and Tangshan Iron and Steel Company have formed Capital Jingtang Iron and Steel Company; Tangshan Iron and Steel Company combined with Chengdu Iron and Steel Company; and several other mergers are ongoing.

Sources say the National Development and Reform Commission announced in May that no new steel project will be authorized in Shandong unless the province restructures its current steel industry.

"Even if Shandong does not restructure by itself, the local steel companies will be reshuffled by some national or international steel oligarchs," said Professor Dong Yanling from Shandong Regional Economics Research Institute, in a recent interview with the Economic Herald.

"We have recommended since last year the Shandong Government restructure the two companies and then extend the new development to the neighbouring coastal areas," he said.

Dong said both Jinan and Laiwu have seen a heavy load of industrial activity, involving transportation, water supply and energy.

Jinan has always had a water shortage, and the 11th National Games are to be held there in 2009. Named as China's Steel City, Laiwu, the smallest city in Shandong, has tried to exploit every square inch of its land to serve its steel industry.

Nearby coastal city Rizhao is a rising star along China's coastline in recent years, with an annual port capacity of over 100 million tons. It has been an ideal candidate for several steelmaking giants including Shanghai Baosteel and Jinan Steel.

Early this year Laiwu Steel signed an agreement with the world's second-largest steel giant Arcelor to sell 38.41 per cent of its stake to the latter, making them the two largest shareholders in Laiwu Steel.

Just last week the world's No 1 steel giant Mittal successfully took over Arcelor. The mammoth Mittal-Arcelor merger might affect the final results of the ongoing Acelor purchase case as well as the Laiwu-Jinan merger.

"Arcelor's purchase is still awaiting approvals from both governments, and there are surely a lot of changeable things," Laiwu Steel official Zan Yongqing told China Daily yesterday.