Besides this, the top 10 Chinese steelmakers contributed a measly 36.8 percent to the country's total steel production in 2007, while the top 10 steel companies in Western countries produced 70-90 percent of their country's respective total.

China's Asian neighbors also eclipsed its steel production. About 75 percent of Japan's total steel production came from its top five enterprises in 2007. In the same year, South Korea's leading steelmaker, POSCO, accounted for 64 percent of the country's total.

Luo said China's highly fragmented steel industry faces the risk of being marginalized by fierce competition. Only through the current shake-up would the industry be able to optimize its resource allocations, including raw materials, capital and human resources, he said.

Self rescuers

Steel industry analysts expect to see further reform in the sector, following pledges by the Chinese Government to shut down outdated mills in an effort to boost the industry's efficiency, cut energy consumption and reduce pollution.

The government also has mandated that the 10 largest steel producers must account for 50 percent of the country's total steel production by 2010, and 70 percent by 2020, up from the current 36.8 percent. The companies are setting out to accomplish this task by combining their operations and boosting their margins through mergers, in keeping with the global industry trend.

Indian giant Mittal Steel, for example, became the largest steelmaker in the world in 2006 when it took over Europe-based Arcelor, the former No. 1 company. Arcelor previously had been formed by the merger of three large steelmakers in France, Luxembourg and Spain. Xu Zhongbo, an industry professor at Peking University told Shanghai Securities News that these global mergers had allowed major steel producers to increase their production capacities.

Nevertheless, China, traditionally a large steel producer, lacks a world-class player in the industry. Even the largest steelmaker, Baosteel, accounts for no more than 10 percent of the nation's total output. It is imperative for China to form unions with regional steel giants so they can compete with the foreign titans, Xu said.

The latest merger between Tangsteel and Hangsteel is the first step in playing catch-up. The newly created HISG is expected to produce 50 million tons of steel annually by 2010. The combined assets of both companies also have boosted the new entity's production capacity and increased the added value of its steel products. The merger, believed to be the largest in the industry, would accelerate the sector's reform, said Jiang Qihua, Vice Secretary General of the China Iron and Steel Association, in an interview with Xinhua News Agency.

Coming on the heels of the HISG deal, Baosteel announced on June 24 that it would phase out a 35.86-billion-yuan ($5.12 billion) joint venture in Guangzhou with two domestic rivals. Baosteel will own an 80-percent stake worth 28.69 billion yuan ($4.17 billion), while Guangzhou Iron and Steel Enterprises Group and Shaoguan Iron and Steel Group will own the remaining 20 percent and the company's existing assets. The firms expect to set up the new venture, Guangdong Iron and Steel Group, before August.

With this move, Baosteel hopes to join the ranks of the world's top three steelmakers and produce 80 million tons of steel annually by 2012, the company's announcement said.

China's steel industry overhaul will reach a peak in the next two to three years, Luo said. The rising price of iron ore around the world also is forcing small steel enterprises to succumb to acquisition bids by larger ones, he added.

Running aground

The country's steel industry's reshuffling efforts have been slowed to some extent by local governments' reluctance to lose their largest employers