Baosteel Group, China's largest iron and steel maker, yesterday signed a contract with Handan Iron & Steel Group for a 19.37 billion yuan joint venture plant in North China's Hebei Province.

The 50-50 plant will have the capacity to produce 4.6 million tons of products, including steel sheets for automobiles and appliances, when completed in 2010. The registered capital for the new plant is 1.2 billion yuan, according to a statement by Baosteel.

A formal announcement is expected today.

In January, Baosteel bought controlling stake in Xinjiang Bayi Iron & Steel Co, regarded by analysts as an important step for the company as it expands in China through cross-region mergers and acquisitions.

"Baosteel plans to acquire Handan Iron & Steel by gradually increasing its holding shares of Handan Group's listed unit," said Liu Baoyang, an analyst from Guangfa Securities.

Currently, assets in the new plant belong to the Handan Iron & Steel Group, but are expected to be injected into the listed unit in the future, according to Liu.

Auto steel sheets can create high profits for steel companies, though high-end products are currently produced by large-scale companies in China and overseas.

"Baosteel has enough capital and technological competency to develop the new products, which are high value-added," Liu said, adding that the net profit of auto sheets is expected to be around 500 yuan per ton.

The Chinese government is encouraging steel companies to eliminate outdated steel production methods to save energy and prevent oversupply.

Baosteel, which aims to increase total capacity to 50 million tons from 22 million tons by the end of 2012, is expected to have a new acquisition this year.

"Baosteel is still in discussions with Baotou Steel & Iron for an acquisition," Chen Liang, an executive from Baosteel Group strategy and planning department, said recently.

"Large-scale steel companies will continue to acquire small-scale companies in order to strengthen their competitive edge in the international market," said Chen.

Shares of Baoshan Iron & Steel Co rose 6.01 percent to close at 12.7 yuan while Handan Iron & Steel jumped 6.96 percent to close at 8.76 yuan yesterday.

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