China's second- and fifth-largest steelmakers may merge with each other to consolidate their resources and narrow the gap between themselves and the industry leader - Shanghai's Baosteel Group. But analysts, however, doubt the prospects for merger.

The two Liaoning Province-based steelmakers, Anshan Iron & Steel Group Corp and Benxi Iron & Steel (Group) Co Ltd, are reportedly in discussion for an alliance and possibly will close the deal within the year.

The merger is encouraged by the Anshan city government, where the two firms are located. Zhang Jiehui, the mayor, was quoted as saying that the alliance will create economies of scale and help reduce the raw material supply cost.

Anshan, the second- largest, produced 10.06 million tons of steel in 2002 while Benxi, the fifth-biggest, manufactured 6.21 million tons of steel in the same period.

If the two companies were to merge, their production capacity will be closer to that of China's biggest steelmaker, Baosteel's 19.48 million tons.

"Anshan has been discus-sing the possibility to merge with Benxi since 2001," an official from Anshan said in a telephone interview, "However, no specific action has been taken so far."

But industry analysts doubt the merger will be effective in improving efficiency.

"I don't think it is possible for Anshan and Benxi to merge as one company in the short term," said Qu Li, analyst with China Securities Co Ltd. "The two companies are both enjoying quite good earnings and there's no motivation to merge."

"The would-be merger may even erode the two companies' interests if the internal management between the two firms can't be dealt with properly and thus leads to increased management cost," said Li Xiaohong, analyst with GE Securities Co Ltd.

(Shanghai Daily August 12, 2003)