The deal, if completed, would be the biggest merger in China's steel industry.

Baosteel has clinched a series of cooperative deals with domestic steelmakers including Ma'anshan Iron and Steel and Shaoguan Iron and Steel Group, alliances that analysts say could become M&A targets.

It signed a similar cooperative agreement with Bayi Group last year.

Bayi, which has annual production capacity of 3.5 million tons, produced 2.8 millions tons of steel in 2005.

It made a net profit of 179 million yuan from revenue of 9.5 billion yuan in 2005.

Baosteel, which produced 23 million tons of crude steel in 2005, plans to increase its annual steel production capacity to 30 million tons by 2009 and 50 million tons by 2012.

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