China's largest steel producer, Shanghai Baosteel, has set its eyes on Baotou Iron & Steel Group after global steel baron, Lakshmi Mittal's bid for a 50 per cent stake in the Chinese company faltered.

Board Chairman of the Baotou Iron & Steel Group Lin Donglu said Baosteel is in talks with his company for a merger.

The consolidation of steel businesses in China is key to the profit prospect of steel plants with annual production capacity of less than ten million tonnes, Lin, also a deputy to the National People's Congress, the parliament, at the ongoing NPC annual session.

Shanghai-based Baosteel is seeking acquisition targets nationwide. It acquired 69.61 per cent of the stocks of Xinjiang Bayi Iron & Steel in January, Lin said, taking the acquisition as a wise move.

"The restructuring is in line with the government policy of encouraging consolidation in the steel sector and a win-win strategy for all since we can share technology, capital and sales network," he was quoted as saying by Xinhua news agency.

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Liang Tiecheng, director of the Regional Reform and Development Commission in north China's Inner Mongolia Autonomous Region where Baotou is located, said Baosteel had proposed to purchase a controlling stake of Baotou Iron & Steel Group.

But the request has not been decided. Baotou Iron & Steel produced 7.48 million tonnes of crude steel last year, compared with 22.5 million tonnes from Baosteel.