An alliance between Japan's top steelmaker and Shanghai-listed Baoshan Iron & Steel Co Ltd would be a boon to global carmakers, who are eager for steelmakers to form networks to supply steel products of equal quality worldwide.

It would also be the first tie-up between Chinese and Japanese steelmakers. The latter are keen to get a foothold in China's fast-growing market.

"We are in negotiations but nothing has been decided at this point," said a spokeswoman for NSC, the world's number two steelmaker.

Officials at Baoshan and its parent, Shanghai Baosteel Group, declined to comment directly on the possible joint venture.

"We have frequent exchanges on technology and management experiences with world steel giants, including Nippon Steel," a Baoshan spokeswoman said. "We are competitors as well as partners."

The Nihon Keizai Shimbun business daily said on Wednesday the two steel giants were planning to set up a plant in Shanghai as early as 2002.

Last December, NSC said it had been asked to take a stake in Baoshan but would not consider the request until the Chinese company was listed overseas.

Baoshan's vice chairman and president, Xie Qihua, said the firm would cooperate with foreign steel giants on technological development, but any capital investment would have to wait until its global listing.

Baoshan has given no timetable for any such listing.

The deal was initially proposed by NSC President Akira Chihaya when his Chinese counterpart visited Tokyo last month, the Nihon Keizai Shimbun said.

The two companies expect to hammer out an agreement by the end of this year, it added.

NSC already has tie-ups with South Korea's Pohang Iron & Steel Co Ltd and France's Usinor

In late afternoon trade, NSC shares were down 1.65 percent at 179 yen, although analysts said that a tie-up would boost Nippon Steel's market share in China and thus be good for its stock.

The benchmark Nikkei average was down 1.94 percent.

The steelmaker's stock has shed some 50 percent of its value since June 1997 and is about 82 percent shy of a lifetime high hit in February 1989.

Analysts said a tie-up with Baoshan would fit with NSC's efforts to hang onto its position as Asia's top steelmaker at a time when its Japanese rivals are banging out alliances with major foreign steelmakers.

"It wouldn't come as a surprise, especially with Baoshan looking to list overseas," said Kazuhiro Harada, an analyst at Tokyo-Mitsubishi Securities.

NKK Corp and Kawasaki Steel Corp -- set to begin merging next year to become Japan's biggest steelmaker -- said in April they would hold talks with Germany's Thyssen Krupp Steel AG on a global alliance.

That announcement followed news in February of a mega-merger between three European steelmakers -- France's Usinor, Luxembourg's Arbed SA and Spain's Aceralia.

The tie-ups reflect consolidation taking place worldwide, driven in part by a shakeup in the auto sector.

Steelmakers worldwide are also under pressure to rationalise in the wake of falling steel prices caused by overcapacity in the industry and rapid growth of Chinese and South Korean steel firms.

NSC posted robust profits for the year that ended in March but faces a tough road ahead because of slowing demand and rising price competition.

The company said in May it expected Japan's total crude steel output for the year to next March to fall 8.4 percent from a year earlier to 98 million tonnes. It sees sales dipping 1.1 percent to 1.24 trillion yen (US$9.90 billion) for the current business year.

(Agencies 07/11/2001)