Wuhan Iron & Steel Group has agreed to pay 6.5 billion yuan (US$805 million) to own 51 percent of the state-owned Liuzhou Iron & Steel Group, boosting its production capacity by a third.

Wuhan Steel and Liuzhou Steel signed the agreement on Monday, said Zhao Hao, a spokesman for Wuhan Iron & Steel Co, the Shanghai-listed unit of Wuhan Steel Group. The government will take the remaining 49 percent stake in the joint venture, which will control Liuzhou's mills and plants, he said.

The acquisition will increase Wuhan Steel Group's annual production capacity to 20 million metric tons from about 15 million tons, Wuhan's Zhao said. Wuhan will remain the nation's third-biggest producer after Baosteel Group Corp and Anben Iron & Steel Group.

"The move enables Wuhan Steel to access a bigger market in exchange for taking over less profitable rivals to help ease a domestic glut," said Lin Hai, a steel analyst at Guotai Asset Management Co in Shanghai.

Wuhan Steel, based in the central province of Hubei, also bought the controlling stake in Guangxi-based Liuzhou Steel to help win central government approval to build a steel plant at Fangchenggang in southern China's Guangxi. It wants to beat Baosteel Group's proposal to build a similar project in the neighbouring Guangdong Province to tap demand from local units of carmakers such as Toyota Motor Corp.

Baosteel plans to build a plant in Zhanjiang, Guangdong Province to produce as much as 20 million tons a year of the alloy. Wuhan Steel and Liuzhou Steel want to build a plant at Fangchenggang to make 10 million tons of steel a year. The government has said it is unlikely to give the go-ahead for all of the projects planned in southern China.

China is restricting lending to smaller players to rein in excessive investment. Capacity expansions must combine with the closing of obsolete facilities, the government said in July.

Wuhan Steel may close part of Liuzhou Steel's existing facilities to gain approval to expand in the neighbouring Fangcheng Port, analysts have said.

"Wuhan Steel has a winning edge over Baosteel by taking over Liuzhou Steel," said Guotai's Lin. "But it could be too optimistic to say that Wuhan Steel will receive approval within two years to build the plant, given the circumstance that the government is trying to slow the expansion of the industry."

China, whose 264 steelmakers supply a third of the world's steel, wants to consolidate mills to help ease an oversupply of steel. Getting bigger will also help them compete with global rivals such as Mittal Steel Co and spend more on making high-quality products for cars, ships and home appliances.

China wants to limit production capacity to about 400 million tons a year in the next five years to slow expansion that's led to the glut and driven up raw material costs. Steel capacity jumped 35 percent to 419 million tons last year. China may use 300 million metric tons of steel in 2005, the government said in June.

(China Daily December 21, 2005)