Speculation remains

While the merger of Shandong Steel may have brightened prospects for a streamlined sector, it also raised eyebrows.

The biggest controversy surrounds the fact that the steel merger was an arranged marriage. When Shandong Steel extended an olive branch earlier this year, the private mill declined the offer, citing its own financial performance as far better than the bidder's. In the first half of this year, Rizhao Steel raked in a net profit of around 1.8 billion yuan ($263.4 million) while the Shandong Steel reported painful losses of 1.36 billion yuan ($199 million).

Low management efficiency and integration failures between its subsidiaries left Shandong Steel vulnerable to the market bust. In striking contrast, Rizhao Steel has shaken off the dust from the financial fallout by leveraging its rich resources and its proximity to Rizhao port.

With the powerful local government acting as a middleman, Rizhao Steel had no choice but to concede after months of struggling. So why did the Shandong Provincial Government push so hard for the merger?

The Shandong Provincial Government explained in a statement that the merger was intended to make way for Shandong Steel to build a production base for fine steel in Rizhao as part of its coastal economic belt. Analysts believe a stronger incentive was to strengthen the fragmented steel-making business in the province and help it ride out looming downturns.

The merger would be a mission impossible were it not for the support of the local government, they said. But many of them have cast wary eyes on the forced combination, raising worries over future integrations.

It is highly likely that the government-precipitated tie-up cannot deliver effective integration due to insurmountable barriers in sales and human resources management, said Hao. "A possible result is that the two live under the same roof, but on different floors," he said.

Their divide in corporate cultures and marketing methods may also force operational costs to increase, sowing the seeds for future losses, he added.

The stock market has also given a clue to investors' sentiment about the merger. On September 7, right after the merger news broke, shares of Laiwu Steel and Jinan Steel, two Shanghai-listed subsidiaries of Shandong Steel, opened with strong spikes, but closed a minimum 1.47 percent and 1.34 percent higher, respectively. This suggested that investors took the merger as a speculative opportunity rather than a real boon for the prospect of Shandong Steel, though it benefits from strengthened resource assets.