TOKYO – Two of China’s biggest steelmakers agreed to merge their listed units, moving a step closer to a union that would create the nation’s biggest mill and a company with the scale to rival ArcelorMittal.

The publicly traded arm of Shanghai Baosteel Group, the second-biggest Chinese mill by output, will swap shares with the listed unit of Wuhan Iron & Steel Group, its No. 6 steelmaker, the smaller company said in a statement Tuesday. The parents remain in talks about restructuring, Wuhan said, without elaborating. A merger of the groups would be the biggest tie-up since the creation of ArcelorMittal nearly a decade ago.

China’s President Xi Jinping has pledged to shake up the country’s state-owned enterprises as part of so-called supply-side reforms to eliminate excess capacity and bolster an economy growing at its slowest rate in decades. Baoshan’s tie-up with its smaller peer would be the biggest restructuring yet for a state-dominated steel sector struggling with overcapacity and poor profitability. The plan is still under discussion and hasn’t been finalised or approved by government regulators, Wuhan said.

The planned merger is “a sign to show that the Chinese government is very committed to supply-side reform,” Xiao Fu, head of commodity strategy at Bank of China International, said by phone from Beijing. “The momentum is gathering pace and that big trend is not going to reverse.”

JUNE HALT
The merger was flagged in announcements in June, when the companies’ listed units halted their shares and said their parents were in discussions about a restructuring. China has a long-stated aim of creating bigger steelmakers with chunkier market shares and greater sway over prices and production. Merging the biggest mills would reflect the government’s goal of raising the share of output by the biggest ten producers to 60%, Daniel Kang, analyst at JPMorgan Chase & Co, said by phone from Hong Kong.

“The government is determined to pursue mergers and acquisitions,” said Wu Wenzhang, founder and president of consultancy Shanghai Steelhome Information Technology. “After mergers, capacity can be reduced more effectively. This is the big possibility.”

Other deals are on the cards. China aims to establish two major steel groups, one in the north and one in the south, people familiar with the matter said in August. The northern union of Hebei Iron & Steel Group with Shougang Group would be the nation’s biggest producer, with output of 76 million metric tons last year for a share of national production at 10 percent, topping Baosteel-Wuhan’s 8% share in the south, according to 2015 figures.

ANSTEEL MERGER
Ansteel Group, the country’s fourth-biggest producer, could merge with regional peer Benxi Steel Group, Shanghai Securities News reported earlier Tuesday, citing China Iron & Steel Association Vice Secretary General Chi Jingdong. The listed units of both companies said in statements they had no knowledge of any merger. Li Xinchuang, vice chairman of the steel association, declined to comment when reached by phone.

ArcelorMittal, formed in 2007 when Mittal Steel Holdings AG took over Arcelor SA in a landmark deal for the global steel industry, produced 97-million tons of steel last year and has a market value of $17.2-billion. Baoshan and Wuhan were worth $16.3-billion combined as of the June 24 close.

China’s steelmakers have enjoyed better profits so far this year amid a recovery in prices, but its top producers have warned of more trouble ahead as demand goes into a long-term decline after decades of explosive growth. China produced 803-million tons last year and its exports have ballooned as domestic demand slows. That’s prompted trade action from India to the US and calls for China to keep its oversupply in check.

RECORD CAPACITY
China’s crude steel-producing capacity reached a record 1.2-billion tons at the end of 2015, according to the China Iron & Steel Association. The government has told the steel industry to speed up the pace of mandated capacity cuts, after earlier this year ordering 150-million tons of capacity to shut by 2020. China’s efforts to reshape the industry are unlikely to create any effective capacity constraints on steel producers this decade, keeping exports at high levels, according to Macquarie Group Ltd.

While a Bao-Wuhan merger would create synergies in auto-sheet production, marketing and raw material purchases, Wuhan is likely to be a drag on the larger company’s bottom-line and add to its debt burden, according to Custeel.com, an industry consultancy. Both S&P Global Ratings and Moody’s Investors Service have called the prospective restructuring credit negative.