(Yicai) Dec. 29 -- China Baowu Steel Group, the country’s largest steelmaker, is acquiring a 49 percent stake in a Shandong Iron & Steel Group while moving closer to its goal of producing 200 million tons of crude steel by 2025.

Baowu has penned an agreement with the provincial government of Shandong about the "market-oriented approach" which also means that its listed subsidiary Baoshan Iron & Steel will have a nearly 49 percent stake in SD Steel Rizhao, a unit of Shandong Iron & Steel, the Shanghai-based buyer announced yesterday, without disclosing more financial details.

The latter tie-up has been on the agenda for a while as Baoshan Iron & Steel announced early this month it will buy a 48.6 percent stake in SD Steel Rizhao for CNY10.7 billion (USD1.5 billion).

Baowu said earlier that it will spare no effort to produce 200 million crude steel by 2025 and occupy a 15 percent market share globally by 2035 to further hike industrial concentration. Jinan base Shandong Iron & Steel has a capacity of more than 20 million tons a year. Its unit SD Steel Rizhao sits in eastern China's Rizhao, having the advantage of a deepwater port and a large coastal production base.

Removing the competition could eventually lead to a more market-based output. China’s steel industry is still facing serious overcapacity, Wu Wenzhang, chairman of steel information website Steelhome, told Yicai. “The industry must get rid of at least 200 million tons of capacity to reach a balance of supply and demand and will have a round of large-scale mergers and reorganizations in the next three to five years.”

The Chinese government has been promoting mergers and reorganizations of steel firms in recent years. The State Council said in 2016 that a major reshuffle will take place between 2020 and 2025 and from 60 percent to 70 percent of steel made in China will be produced by around 10 firms by 2025.

In this regard, Baowu has joined hands with Magang Group Holding, Taiyuan Iron & Steel Group, Xinyu Iron & Steel Group, and Sinosteel Group since 2019. But most of these reorganizations transferred assets for free in contrast to the latest Shandong deal.

Key steel firms in China reported CNY4.66 trillion (USD661.3 billion) in revenue in the first three quarters of this year, down 2 percent from a year ago, and CNY62.1 billion (USD8.8 billion) in profit, down 34 percent. The average profit was 1.3 percent which is low among 41 domestic industries, per statistics from the China Iron and Steel Association.

Editor: Emmi Laine