China's Iron and Steel Association (CISA) has urged the State Council to rationalize the industry around the top four manufacturers in hopes of developing world-scale companies.

Luo Bingsheng, CISA secretary-general, said that "all the difficulties in the steel industry are directly or indirectly related" to the slow pace of mergers and acquisitions (M&A).

He said that reorganization of the industry should be based on the top four companies: Baosteel Group, the Anshan-Benxi Steel Company, the Shougang-Tangshang Steel Company, and Wuhan Iron and Steel Group Corporation.

China's official industry policy states that by 2010, the crude steel output of the top 10 producers should account for 50 percent of the total, rising to 70 percent by 2020. But the recent trend has actually been just the opposite, with figures indicating increased fragmentation. The top 10 steelmakers' share of production declined to 34.66 percent in 2006 from 46.25 percent in 2001.

Feng Fei, the industrial economy research department director of the Development Research Center of the State Council, contended that local governments have a vested interest in opposing industry reorganization, since steel companies are among their major tax sources.

While China's steel industry has been decentralizing, its competitors abroad have been banding together. In July 2006, Mittal Steel acquired Arcelor to form the first 100-million-ton-year steel maker. In February 2007, India-based Tata merged with Corus to form the world's fifth largest steel maker.

Earlier this month, the world's largest mining company, BHP Billiton, proposed to acquire Rio Tinto. If the deal goes through, it is expected to increase the competitive pressure on China's steel industry.

Zhao Kun, deputy general manager of the Shanghai-based Baosteel Group, has said reorganization was a key method of dealing with international competition but the government should make the decision and promulgate policies that would support reorganization.

He also said the government should help smaller companies to improve their technology levels and production capacity.