A worker takes samples of molten iron for quality testing from a furnace at the Wuhan Iron and Steel (Group) Corp. Photo: CFP

Ansteel Group Corp, China's fourth-largest steelmaker by output, may be the next to jump on the consolidation bandwagon following the merger between Baosteel Group Corp and Wuhan Iron and Steel (Group) Corp (WISCO), as the country works to consolidate an industry plagued by overcapacity.

According to Chi Jingdong, vice chairman of the China Iron and Steel Association, the government is expected to announce a merger between Ansteel and Benxi Steel Group Corp by the end of the year, the Shanghai Securities News reported on Tuesday.

Shares of Angang Steel Co and Bengang Steel Plates Co in Shenzhen, the listed units of Ansteel and Benxi Steel, respectively, were suspended from trading on Tuesday, while the Hong Kong listing of Angang Steel jumped 3.33 percent.

In a filing to the Hong Kong stock exchange, Angang Steel said on Tuesday it had no knowledge of the potential merger mentioned in the report.

Both Ansteel and Benxi Steel were not available for comment on Tuesday.

Early in 2005, Anshan Iron and Steel Co and Benxi Steel announced an intention to consolidate, only to get bogged down in negotiations.

Ansteel is an enterprise administered by the central government, while Benxi Steel is owned by the local government. A merger between the two involves a number of complicated issues including where the taxation revenue will go and who will be responsible for the relocation of employees, which is where efforts failed before, Wang Zhongyuan, a senior analyst at Shanghai-based consulting firm Steelhome, told the Global Times on Tuesday.

"If the two mills pull through the deal this time, then it would become an important reference case and become a new model for similar mergers in the future," Wang said.

Wang also noted that production at the two mills, both based in Northeast China's Liaoning Province, are highly homogeneous, therefore a merger would create synergy and may save costs.

Moreover, a merger would also require the new company to get rid of overlap, echoing the central government's call to reduce excess capacity, Jiang Yining, an analyst from Capital Securities, told the Global Times on Tuesday.

Such mergers are highly anticipated, which will not only result in an industry behemoth, but also resolve overcapacity, Jiang said.

China is determined to cut 100 million to 150 million tons of steel capacity by 2020, which President Xi Jinping reiterated in his opening speech during the Business 20 (B20) summit in Hangzhou, capital of East China's Zhejiang Province, on September 3.

Bigger and stronger

Chi also disclosed that the State Council, or China's cabinet, recently issued a document aimed at facilitating steel mergers, which experts said will help cut excess capacity and optimize production structure in the steel sector.

Specifically, the document, serialized No.46, sets the objective that by 2025, 60 to 70 percent of China's steel output will be produced by about 10 large steel groups, including three to four groups with annual capacity of 80 million tons, six to eight with annual capacity of 40 million tons, and some other specialty steel groups.

Given the government document, it could be expected that more mergers will be seen in the steel sector in the years to come, but what really matters is not how to make it bigger, but to make it stronger, Wang pointed out, adding that mergers of steel mills are not uncommon in China. For instance, Hebei Iron and Steel Group was formed in the merger of Tangsteel and Hansteel in 2008, while Ansteel is the result of a 2010 combination of Anshan Iron and Steel Group and Panzhihua Iron & Steel Group.

"These mergers are just pro forma consolidation. With no actual restructuring and optimization of the business, such deals cannot really affect the industry," Wang noted.

"But I think the Baosteel-WISCO merger plan will make a difference because their business will be fully mixed."

Baoshan Iron & Steel Co (Baoshan Steel), the listed unit of Baosteel, will issue A shares to shareholders of Wuhan Iron and Steel Co (Wuhan Steel), the listed unit of WISCO, for a swap, Wuhan Steel announced in a filing on Tuesday.

The Baosteel-WISCO merger will create a steel giant with annual capacity of more than 60 million tons and over 700 billion yuan ($104 billion) in total assets, which would replace Hebei Iron and Steel Group to become China's largest steelmaker and the world's second-largest mill, behind Luxembourg-based ArcelorMittal.

Shares of Baoshan Steel and Wuhan Steel have been suspended from trading since June 26 when the merger plan was released.