Nov. 6 (Bloomberg) -- China, the world’s largest steelmaker, plans to create one or two producers the size of global leader ArcelorMittal to win better prices from customers and material suppliers, according to a person familiar with the plan.

The Ministry of Industry and Information Technology will push for mergers and acquisitions among the nation’s more than 800 steel mills, according to the person who attended a Nov. 3 government briefing on the policy. The person declined to be identified because the plans aren’t public.

The Chinese government in August said the fragmented steel industry has led to overcapacity, depressing metal prices and reducing the ability of Baosteel Group Corp. and others to obtain cheaper materials. The nation accounted for half of global imports of iron ore in 2008, and failed this year to win a price cut agreement from BHP Billiton Ltd. and Rio Tinto Group.

“Bigger mills will emerge as Baosteel and others lead domestic acquisitions,” said Zhou Xizeng, chief analyst with Citic Securities Co. “The advantages of such a policy are obvious -- bigger mills will be better in technology development, have larger sales channels and lower costs.”

Li Xinchuang, executive director of China Metallurgical Industrial Planning and Research Institute, a state-run government adviser, confirmed a steel policy plan is under discussion. He declined to reveal details.

Consolidation

China should have one or two producers with capacity of 100 million metric tons each by 2015 under the proposed policy. The 10-biggest mills should account for 75 percent of China’s output by 2020, up from an earlier target of 70 percent, said the person, who added steelmakers are reviewing the plan.

ArcelorMittal produced 101.6 million tons of steel last year. Baosteel, China’s biggest steelmaker, made 35.44 million tons, followed by Hebei Iron & Steel Group with 33.3 million tons. The nation’s 2009 output was 500.5 million tons.

The government will allocate iron ore, coal and other resources to companies involved in the consolidation under the policy. It will also encourage and support steelmakers to invest in overseas iron ore and coal mines, and build or acquire steel plants in other countries, the person said.

The policy will require companies in coastal cities or in provincial capitals to close blast furnaces smaller than 1,000 cubic meters to curb overcapacity, the person said.

Chinese steel prices have fallen 20 percent from a 10-month high on Aug. 4. There is “severe oversupply,” Deng Qiling, chairman of the China Iron & Steel Association said Oct 13. China may work out plans to close obsolete mills, merge others and reduce iron ore importers by the end of the year, he said.

Record Iron Ore

China increased imports of iron ore to a record this year. Contract iron ore prices may jump 14 percent next year to the second highest on record, according to a Bloomberg survey of 11 analysts last month.

Under the new policy, the Chinese government also wants steelmakers to reduce reliance on imports of iron ore by buying more scrap steel as alternative raw materials, the person said. Steelmakers can also buy more pig iron and slabs, made from iron ore, instead of producing them, the person said.

The government may also want to curb exports of some semi- finished products, coke and ferroalloy, the person said.

--Helen Yuan. Editors: Tan Hwee Ann,

To contact the Bloomberg News Staff on this story: Helen Yuan in Shanghai at hyuan@bloomberg.net

Last Updated: November 6, 2009 03:33 EST