BEIJING: Steel makers in China are closing ranks to fend off possible acquisition by Mittal Steel, which has just managed to take over Arcelor, the world's No 2 steel producer.

The call for banding together has come from an industry body that is controlled by government.

"We should accelerate M&As within our own companies to create big groups and fend off foreign challenges,"Li Xinchuang, V-P of China Metallurgical Industry Planning and Research Institute, said.

Mittal Steel, which has been scouting around China for investment opportunities since it paid $340 million to acquire 30% in Hunan Valin Steel Tube & Wire Co in Hunan province last year, does not seem to be surprised by the move.

"The Chinese government is trying to speed up the process of consolidation both by bringing in international players as well create mergers between Chinese steel companies,"Sridhar Krishnamoorthy , country head for Mittal Steel in China told ToI.

The Arcelor acquisition has hugely enlarged Mittal's presence in China because Arcelor has substantial stakes in two Chinese steel companies including the biggest of all, the Bao Steel of Shanghai. Arcelor and Nippon Steel of Japan are partners in the state-run Bao Steel, which begun production early this year.

"This (Arcelor takeover) will put great pressure on domestic steel makers which are no match to Mittal and Arcelor in terms of capital, technology and management,"Li was quoted by the state media as saying. "That is a big stimulus for China's steel sector, which contains too many small manufacturers,"he said.

Local steel makers have good reasons to be worried. Global players have been targeting Chinese companies for acquisition because it is the largest domestic market in the world.

Arcelor acquired 38.4% stake in Laiwu Iron and Steel Co in Shandong province after paying $250 million as recently as in February.

Industry sources said Mittal has initiated talks for purchase of stakes in several companies including Baotou Iron and Steel Co, and Baiyi Iron and Steel Co in north China.

China's central government has been trying to encourage smaller steel units to merge and form larger companies with capacities of 15-20 million tonnes in order to ensure cost efficiencies and bring about technological improvements.

But it has not been easy for the government to bring about this change because of several reasons. One reason is that many steel units are owned by provincial governments, which have agendas that are different from the central government and do not wish to give up control over the units.

This difficulty in bringing about mergers among local companies offers an opportunity for companies like Mittal Steel, who are ready to come up with big offers of cash and modern technology.

One of the conditions imposed by government before permitting foreign firms to invest in the steel industry is that they should bring in new technology.

Mittal Steel has inducted new technologies in Valin Steel to meet the commitments made at the time of acquiring shares in October.