Jigang and Laigang recorded losses of 875 million yuan and 598 million yuan respectively in the first half of 2009, while Rizhao earned 1.8 billion yuan profit in the same period.

The combined annual steel production capacity of Jigang, Laigang and Rizhao will be 38 million tons a year, making Shangang the third largest steel mill in China.

Analysts said this deal would facilitate the listing of Shangang as it endeavors to acquire local steelmakers to transform itself into a steel mill of national standing.

Zeng Hai, an analyst with Guolian Securities, said the consolidation would help Shangang expand production capacity, improve management structure, reduce costs, and strengthen competitiveness.

A report by Guosen Securities that was released yesterday said consolidation would ease overcapacity and improve the outlook of the steel sector.

"Domestic demand for crude steel is expected to grow 10 percent or even higher this year," said the report.

Huang Shuyan, an analyst at HuaChuang Securities, said local governments are often the driving forces behind merger and acquisition deals in the steel sector.

Consolidation efforts have gathered speed since the central government issued a stimulus package for the steel industry in January 2009, and encouraged big mills to merge with rivals to create cohesive steel groups. The government also said it would strictly control steelmaking capacity as oversupply problems have weighed on prices and squeezed profit margins.

Last December, Hebei Iron and Steel Co Ltd was set up via the merger of three local steelmakers in Hebei province.

Anshan Iron & Steel Group is also in talks to take over Anyang Iron & Steel Group, the biggest steel mill in Henan province.