China should place tighter controls on foreign investment in its massive but fragmented steel sector, and make bolder moves to consolidate its steelmakers into large groups, according to the industry association.

The threshold for foreign investors in domestic steel firms, especially the large ones, should be raised to ensure that Chinese manufacturers remain the mainstay of the sector, said Luo Bingsheng, vice-chairman of the China Iron & Steel Association.

"The sector should be controlled by (Chinese) State-owned and privately owned steelmakers, instead of foreigners, as it is one of the country's most important basic industries," Luo said.

He made the remarks while commenting on world No 2 steelmaker Arcelor's acceptance of a takeover bid from No 1 Mittal last month and their mergers and acquisitions (M&As) in China, the world's biggest steel-making nation and market.

The takeover bid, worth 26.9 billion euros (US$33.7 billion), is expected to create a super steel group with an annual production of 120 million tons, grabbing one-tenth of the global steel output.

Mittal spent US$338 million last October buying a 36.7 percent stake in Valin Steel Tube & Wire Co Ltd, a Shenzhen-listed steelmaker based in Central China's Hunan Province.

Earlier this year, Arcelor also clinched a deal to acquire a 38.4 percent stake in Laiwu Steel Corp, a Shanghai-listed Chinese steel mill in the eastern Shandong Province, for US$260 million.

According to a national steel industry policy launched last year, foreign investors are banned from having a controlling stake in Chinese steelmakers.

Luo said the expected Mittal-Arcelor marriage poses a great challenge for China's steel sector and therefore it faces a pressing task to speed up "trans-regional and trans-ownership" consolidations to form bigger and more internationally competitive groups.

"The current consolidation pace is too slow. Regional barriers should be broken down," he said.

Currently there are around 800 steelmakers in China, but most of them are small.

China's biggest steel producer Baoshan Iron & Steel Corp only ranked No 6 in the world last year with an output of 22.73 million tons, less than half that of both Mittal and Arcelor.

The sector has witnessed a slew of M&As by leading Chinese steelmakers since last year, including Wuhan Iron & Steel Corp, Anshan Iron & Steel Corp and Shagang Group.

But most of them occurred in the same provinces. For example, the Anshan steel firm in Northeast China's Liaoning Province and Benxi Iron & Steel Corp also in Liaoning were combined into a new entity last year.

China plans to establish two to three steel conglomerates with an annual production of over 30 million tons each by 2010 through consolidations, according to the steel industry policy.

It also expects the top 10 domestic steel companies will control more than half of the country's total steel output by then.

Analysts said global steel giants would accelerate penetration into China's steel sector to expand further and cash in on the country's fast-growing demand for steel.

China has been a main target of Mittal's global M&A campaign as the Netherlands-registered steel group aims to lift its annual production to 200 million tons by 2015, according to Wang Liqun, another official from the Beijing-based steel association.

Statistics from the steel association showed China's demand for crude steel jumped by 13.25 percent year-on-year to 188.41 million tons in the first half of this year.

Meanwhile, crude steel production in the nation stood at 199.47 million tons, up 18.26 percent.

Luo said boosting consolidations of domestic steelmakers is also the "most effective way" to eliminate excessive production capacity in the sector.

According to a government notice issued last month, China's steel production capacity totalled 470 million tons by the end of last year. A further capacity of 70 million tons is under construction.

China plans to remove 55 million tons of backward steel production capacity by 2007.

(China Daily August 2, 2006)