Chinese merger will create a rival to global leader ArcelorMittal

China's largest steel companies, Baosteel and Wuhan Steel, are negotiating restructuring that analysts say could herald a merger. This will create the nation's largest company to compete with ArcelorMittal SA, the world's leading steel producer.

Both companies had a combined market value of $ 16.3 billion as of Friday close and a capacity of over 70 million tonnes. Analysts, including Citigroup Inc. and Mysteel Research, saw the news as a potential merger opportunity.

The deal between the companies will be the largest in China's metals sector since last December, when China's Minmetals Corp., its largest trader, agreed to buy government-owned engineering and mining groups as the country seeks to reduce excess capacity while building competitive firms in the global marketplace.

"The merger of Baosteel and Wuhan Steel is in line with the government's strategy to improve efficiency and reduce overcapacity," said Xu Xiangchun, chief analyst at consultancy Mysteel Research. “With the help of these two leading companies, the efforts would have had the greatest impact,” experts say.