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ArcelorMittal Buys Control of Chinese Steel Mill

Arcelor Mittal, the world's largest steel maker, has raised its stake in China Oriental Group to over 73 percent, becoming the first foreign firm to take control of a Chinese steel maker.

Arcelor Mittal, which for years has tried to buy a larger footprint in the world's top consumer and producer of steel, may have paid as much as US$1.7 billion for the deal based on a previous, smaller investment in the firm.

"This will provide Mittal with a foothold to enter the Chinese market, and they can use this company as a platform for further mergers and acquisitions," said Feng Zhang, JP Morgan's steel analyst.

Beijing has pushed a consolidation of its fragmented, overcrowded steel arena for years, encouraging mergers between national champions but also investments by global players, but strict controls over foreign ownership have deterred the pace of acquisitions.

ArcelorMittal, which has struck acquisition deals with several Chinese mills -- including a pact to buy 38 precent of Shandong-based Laiwu Steel -- paid $647 million for a 28.03 percent stake in Oriental earlier this month.

Stock exchange data showed that the Luxembourg-based steel giant, born of a landmark merger spearheaded by billionaire Lakshmi Mittal, lifted its slice of Oriental to 73 percent although no financial terms were unveiled.

An Oriental spokeswoman declined comment but said the company would issue a statement on Thursday or Friday.

China forbids foreign control of major steel makers, a major sticking point in ArcelorMittal's past efforts to invest in China. But Oriental, which was privatised in 2001, is registered in Bermuda and, although it runs a Chinese steel operation, is technically a private, overseas company.

ArcelorMittal now controls a minority slice of Valin Steel Tube & Wire, though it had to trim its stake to comply with curbs on foreign
ownership.

Waiting for the Nod

The Oriental move followed ArcelorMittal's most recent agreement to buy a majority stake in a Chinese steel wire firm, Rongcheng Chengshan Steel Cord, for $27 million. That deal awaits government approval.

And its agreement to buy into Laiwu is still pending approval after more than a year of waiting.

Based in central Hebei province, Oriental supplies the building and construction market with H-beams and other long products, as well as flat steel via a joint venture. It hopes to expand annual steel capacity by 150 percent to 10 million tonnes from 4 million tonnes by 2010.

Shares in Oriental had long underperformed the market, which is why former Executive Director Chen Ningning this year tried to tak eover of the firm, hoping to galvanise its performance.

But Chairman Han Jingyuan, who along with his management team owns a combined 45 percent of the company, rejected Chen's offer of HK$2.9 per share as being too low.

Han had taken over the company in 2001, taking advantage of a growing trend of state enterprise privatisation. The conflict raised investors' hopes of a bidding war.

The stock has tripled in the past year, closing at HK$5.40 prior to a trading suspension on Nov. 7.

Chen ended up selling her stake in the firm to ArcelorMittal this month.

"We believe more could be done with aggressive leadership to rise its profile and drive value-added growth," Merrill Lynch had said in a recent research report.