TOP steelmaker China Baowu Steel Group is in talks to take over rival Magang Group, three sources familiar with the discussions said, a deal that would help entrench the nation’s position as a serious competitor in global steel markets.

The mega-marriage would sharply narrow Baowu’s gap with top-ranked international producer ArcelorMittal, and would be a major step in China’s drive to consolidate its steel industry. Baowu and Magang’s combined steel output last year surpassed total U.S. production.

It would mark the next big takeover in the country’s steel sector after Baowu, the world’s No. 2 steelmaker, was created by Baosteel Group’s 2016 acquisition of Wuhan Iron and Steel that valued the latter at about 3 billion yuan (US$438 million).

The talks are yet to move beyond a preliminary stage, said a source. The source did not indicate possible pricing.

“(A deal) would be very reasonable and normal. After all, the two companies are geographically close,” the source said. “It would be easy ... to collaborate and their products are complementary.”

Magang is headquartered in Maanshan City in China’s eastern Anhui Province, about four hours drive from Shanghai, where Baowu Group is based.

Baowu mainly churns out flat steel products used in manufacturing, while Magang’s output is split between flat and long steel products, the latter used in construction.

Baowu in 2017 produced 65.39 million tons of steel and Magang made 19.71 million tons. Their combined output of 85.1 million tons would be just 11.9 million tons below ArcelorMittal’s production last year and compares to the U.S. total of 81.6 million tons.

It would also put Baowu closer to its plan to expand its capacity to 100 million tons by 2021 from around 70 million tons currently.

“The two companies are in talks for consolidation,” said a high-level official overseeing China’s steel industry, who declined to be identified. “I think it’s a good thing for both companies — that’s two giants combining.”

Baowu had total assets worth 745.6 billion yuan at the end of 2017, while Magang’s were valued at 72.2 billion yuan.

Both producers sell the bulk of their output at home, although Baoshan Iron & Steel, Baowu’s listed unit, exported 3.8 million tons last year, about 8 percent of its total output. (SD-Agencies)