Wang Xiaoqi, deputy director of the Industry Planning Division of the State Economic and Trade Commission, said alliances in all forms will help domestic steel makers reduce production costs, enhance product development and marketing capabilities, and engage more strongly in the world market.

"It is important for the steel industry over the next five years to launch enterprise groups through alliances between domestic steel makers in different regions and with foreign companies,'' Wang said on Sunday.

His remarks followed a cooperation agreement signed last week by three steel giants - Shanghai-based Baoshan Iron and Steel (Baosteel), Wuhan Iron and Steel in Hubei Province and Beijing-based Shougang Iron and Steel - on steel scraps purchasing.

The agreement was a substantial step towards an alliance established in March between the three companies.

He Wenbo, deputy general manager of Baosteel, said the cooperation agreement for the purchasing and other material sourcing, including coal and iron ore, was a beginning. He said their alliance would extend to new product development and marketing, fund raising and information exchange.

Liu Jinghai, an analyst with the China Metallurgical Economic Research Center, said the alliance between the three companies was a bold move of the industry, which would meet increasing challenges after the country enters the World Trade Organization (WTO).

China will cut its tariffs on steel imports by 2.5 percent on average and cancel import quotas after the WTO entry, expected later this year.

Recognizing the urgency to develop the industry, other domestic steel companies have set out to form consolidations.

Four steel makers in Liaoning Province - Anshan, Benxi, Dalian and Fushun iron and steel companies - plan to merge into a giant company with an annual production of 10 million tons this year.

Wang said steel makers in Hebei Province, including Tangshan and Handan iron and steel companies, were also preparing to establish an alliance.

Associations are expected to help the industry concentrate more than 80 percent of their production at the 10 largest steel makers during the country's 10th Five-Year Plan (2001-05) against the current 50 percent, Wang said.

China's steel output was 127 million tons last year

The alliances between domestic companies are the first step towards a more aggressive engagement in the world market, he said.

"Domestic companies must accelerate their consolidations because the shake-up of the world's steel industry has gone beyond our expectations,'' he said.

Three European steel companies -France's Usinor, Arbed of Luxembourg and Spain's Aceralia - announced in February an all-share merger worth US$4.6 billion to create the world's biggest steel maker.

Wang said the Chinese government was encouraging domestic companies to tie up with foreign firms.

A Baosteel spokesman confirmed earlier this year that the company, which went public in Shanghai last year, intended to form a cross-shareholding agreement with Nippon Steel of Japan and South Korea's Pohang Iron and Steel after its listing on the overseas stock markets.

Currently, Baosteel's marriage with Nippon Steel and Pohang is at the level of technical exchange and market trend analysis.

The three conglomerates now control one-fifth of the Asian steel market.

China Steel Corp, the largest steel maker in Taiwan Province, was reported last week by foreign media sources to be seeking a strategic alliance with five major Japanese steel companies, including Nippon Steel, to counter rising raw material costs.

(China Daily 07/09/2001)