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PrintSHANGHAI (Reuters) - China's Shandong Iron and Steel Group has started due diligence on Rizhao Iron and Steel, marking a key step in its planned takeover of one of the sector's largest non-state firms, three sources familiar with the matter said on Monday.
The consolidation is part of a plan by the government of eastern China's Shandong province to streamline its steel sector, one of the country's largest and most fragmented, a spokesman with the province's state-owned asset regulator said.
The province hopes to build a state-of-the-art steel mill in Rizhao city with annual capacity of 20 million tonnes, he said.
"We are sticking to that target despite a slowing economy, and the restructuring of Shandong Steel and Rizhao is proceeding according to plan," he added.
Rizhao and Shandong Iron and Steel signed a letter of intent on consolidation early this month. Fast-growing Rizhao produces 8 million tonnes of crude steel annually and has attracted analysts' attention for its high profit margins.
"Shandong Steel has sent a team to Rizhao today to check out its books and assets," a source with direct knowledge of the matter told Reuters on Monday.
Shandong Steel and Rizhao could not be immediately reached for comment.
Rizhao is wholly owned by billionaire Du Shuanghua. Shandong Steel was formed by the merger of the state-owned parent companies of Laiwu Steel Corp (600102.SS: Quote, Profile, Research, Stock Buzz) and Jinan Iron and Steel Co (600022.SS: Quote, Profile, Research, Stock Buzz).
The sources said that, while Rizhao had resisted a takeover, it now seemed likely that the government-backed deal would go ahead, resulting in one of China's largest nationalisations in recent times in terms of asset value.
In 2007, Rizhao ranked 20th in output among the country's steel mills, most of which are state-owned enterprises.
China has struggled to consolidate its fragmented steel sector, the world's largest, as it strives to build up globally competitive majors, facing resistance from local governments keen to protect jobs and tax revenue and from managers reluctant to give up control.
Du is China's eighth-wealthiest person according to Forbes' ranking for 2008, with an 11 billion yuan ($1.6 billion) fortune. ($1=6.823 Yuan)
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