A new steel consortium is to be established in East China's Shandong Province, bringing together two local steel producers Jinan Iron & Steel Group and Laiwu Iron & Steel Group.

The Shandong provincial government, owner of both the Jinan and Laiwu steel companies, will inject their assets to form a new entity, the Shandong Iron & Steel Group, the two companies' listed arms said yesterday in a statement to the Shanghai Stock Exchange.

The two firms will be shareholders of the new group, which is expected to be China's second-biggest steelmaker only after Baoshan Iron & Steel Group based in Shanghai.

Last year, the Jinan steel firm produced 10.4 million tons, ranking No 6 in China, while the Laiwu steel company came in at No 7, producing 10.3 million tons.

The move represents a big step for China in its push to create larger steel groups that will be able to compete internationally.

The two listed subsidiaries Jinan Iron & Steel Co Ltd and Laigang Steel Corp didn't reveal the equity structure or further details of the new group.

However, analysts said the upcoming consolidation would possibly affect the listed firm Laigang Steel's share sale deal clinched earlier this year with Arcelor.

Laigang Steel agreed to sell a 38.4 per cent stake to Arcelor for US$260 million, which is still awaiting regulatory approval.

"The consolidation (of Jinan and Laiwu) is likely to bring about uncertainties in the deal with Arcelor," said Zhou Xizeng, an analyst with CITIC Securities in Beijing.

"It's hard to predict and it will be determined by the government," Zhou said.

The parent firms of Jinan and Laiwu steel companies have total assets of 33.7 billion yuan (US$4.2 billion) and 34 billion yuan (US$4.3 billion) respectively, according to their websites.

In the stock market, Jinan Iron and Steel Co Ltd closed at 3.75 yuan (46.86 US cents) per share yesterday, down 3.1 per cent, while Laigang Steel ended at 5.66 yuan (70.75 US cents), up 2.17 per cent.