The world's largest steel maker ArcelorMittal has signed an agreement to allow itself to eventually acquire a controlling stake in Hong Kong-listed mainland firm China Oriental Group.

The deal is seen as a solid move toward its future expansion in the world's fastest-growing steel market.

Under the general offer, the steel giant would pay up to HK$6.826 per share to acquire the major shareholder's 45 percent stake in the company over an agreed period of time, according to a joint statement.

ArcelorMittal, which holds a 28.02 percent stake in the Hong Kong-listed China Oriental, will eventual hold 73.13 percent.

The general offer is subject to the anti-trust clearance by the Ministry of Commerce and the State Administration for Industry and Commerce in China.

After news of its sale, China Oriental's shares yesterday surged as much as 31.5 percent to HK$7.1 before settling at HK$6.44, for a gain of 19.3 percent despite the loss of 776.71 points in the benchmark Hang Seng Index.

"Our focus is still in China," said Ondra Otradovec, vice-president of ArcelorMittal. "We will not stop with China Oriental."

"Compared to China's 500 million tons of total (steel) output, our share of the market is still very small, but we have no other specific plan."

China Oriental, with production bases in North China's Hebei and South China's Guangdong provinces, plans to increase its production capacity from 4.3 million tons to 10 million tons in 2010.

Han Jingyuan, chairman of China Oriental, said the company will reach the goal by upgrading production facilities, along with mergers and acquisitions.

The company will be able to maximize its growth with the help of ArcelorMittal.

The two companies have also entered into business cooperation.

Under the agreement, ArcelorMittal will share technology, expertise and know-how with China Oriental and help the company outsource iron ore and coal.

ArcelorMittal has been aggressively expanding into China's steel market, which is dominated by State-owned steel makers. Yet, merger and acquisition of State-owned enterprises are strictly controlled by Chinese regulatory authorities.

Dirk Matthys, chief executive officer of ArcelorMittal China, said that China's Laiwu Steel Company, another Chinese partner of the global company, had decided not to extend an agreement to sell its 38.41 percent to ArcelorMittal.

ArcelorMittal's other existing investments in the Chinese mainland include a 29.19 percent stake in Hunan Valin Steel Tube and a 12 percent interest in Baosteel-NipponSteel/ AcelorMittal Automotive Sheet Joint Venture.

"China Oriental is mainly engaged in low-value steel production. With the technology and expertise of the foreign counterpart, the quality and capacity of its products will be significantly lifted," said Kenny Tang, associate director of Tung Tai Securities, believing that China Oriental would benefit substantially from the acquisition.

ArcelorMittel previously acquired its 28 percent stake from a former major shareholder of China Oriental Chen Ningning, also known as the "queen of the iron industry".

The relationship between Chen and the company's management deteriorated following Chen's buyout bid for the company this summer.

Chen failed to get approval from the shareholders for the privatization, although she raised her bid to HK$4 a share in September.

(HK Edition 12/14/2007 page6)