China, the world's No 1 steel manufacturer and consumer, is expected to change the rules governing foreign investment in its fast-growing steel sector.

The nation will forbid foreign steel producers from taking controlling stakes in domestic steel companies, Qi Xiangdong, deputy secretary general of China Iron and Steel Association, said yesterday.

Foreign steel producers, if they want to invest in China's steel sector, must "have independent intellectual property in steel-making technologies and have an annual output of 10 million tons," Qi told China Daily.

These restrictions will be included in a national steel industry policy, which is to be released next week, he said.

They come as foreign steel giants are speeding up mergers and acquisitions (M As) in China's steel industry, and even seeking majority stakes in domestic steel mills.

Mittal, the world's biggest steel group, will buy a 36.67 per cent stake in Valin Iron and Steel Co Ltd - a Shanghai-listed steel maker in Central China's Hunan Province, the Chinese company said last month.

The figure will be less than it previously intended.

In January, Mittal and Valin's State-owned parent agreed to each having a 37.17 per cent stake in the Shanghai-listed firm.

Arcelor, the world's No 2 steel company, has also been seeking a controlling stake in Laiwu Iron and Steel Co Ltd - a Shanghai-listed steel maker in East China's Shandong Province.

Both Valin and Laiwu are among China's top 20 steel makers.

Analysts said the expected steel policy indicates that the Chinese Government is unwilling to see foreign steel giants control the steel sector.

"The steel sector is one of backbones of China's steadily-growing economy. Therefore, it should not be controlled by foreigners ," said Tian Shuhua from China Galaxy Securities Co Ltd.

However, Tian said foreign steel giants still have many opportunities because China's steel sector and market will continue to grow rapidly, although they will be banned from having majority stakes in domestic steel mills.

"Foreign steel giants could also accelerate technical collaborations with Chinese partners," he added.

China produced 272.8 million tons of steel last year, up by 22.7 per cent from 2003.

The steel association predicted earlier that the nation's steel output will reach 300 million tons this year.

Qi said the expected steel policy will boost associations between Chinese steel makers in different regions through cross-shareholding and other measures to form bigger groups that will improve the fragmented sector's competitiveness.

Zhou Xizeng, from CITIC Securities Co Ltd, said, "The new steel policy also indicates that the government hopes to put China's steel sector in order, instead of letting foreign giants do it."

There were 871 steel producers in China by the end of last year, of which only 15 had an annual crude steel output of more than 5 million tons.

Shanghai Baoshan Iron and Steel Corp, China's biggest steel maker, only ranked No 6 in the world. The company now has an annual steel production capacity of more than 20 million tons, compared with Mittal's 58 million tons and Arcelor's 46 million tons.

Luo Bingsheng, another top official from the steel association, last month suggested that Chinese steel companies should form four to five bigger groups with an annual steel output of more than 30 million tons through M As within the next two to three years.

Anshan Iron and Steel Corp and Benxi Iron and Steel Corp, another two Chinese steel heavyweights in Liaoning Province, are expected to merge to form a new group this month or later, said sources from the two companies. It should have a production capacity of more than 20 million tons.

China imported 13.2 million tons of steel products in the first half of this year, up 26.8 per cent from a year ago, according to Qi.

Meanwhile, the nation's steel exports surged by 154 per cent to 11.6 million tons.

China imported 133 million tons of iron ore in the period, up 34.3 per cent.

(China Daily 07/14/2005 page9)