A week ago, Baosteel, China's flagship steelmaker, said it plans to join with a smaller rival to take over and restructure a third firm.

It will have a majority 56.15 percent stake, worth over 2 billion yuan ($292.4 million), in the new joint venture Ningbo Iron and Steel Co.

Its smaller partner, Hangzhou Iron and Steel Group Company, will have the remaining 43.85 percent stake.

Last December 27 steelmaking and mining companies in Tangshan, Hebei province, established Tangshan Great Wall Steel and another 12 formed Tangshan Bohai Steel, in China's biggest restructuring of privately owned steel businesses to date.

There were 17 mergers and acquisitions in the steel industry in 2008. Some took place in the first half of last year when the market was still on the rise.

Last March Shandong Jigang and Langang merged into Shandong Steel Group and in June, Tangsteel and Handan Steel, both in northern China's Hebei province, merged into Hebei Steel Group, with support from the provincial government of Hebei.

Only a couple months later the steel industry started feeling the effects of the expanding global financial crisis.

Most steelmakers have been in the red since last October. According to statistics from China Iron & Steel Association (CISA), 62 percent of 71 large and medium-sized steel producers the group monitored, had losses, totaling 29.1 billion yuan, in December 2008.

Sinolink Securities analyst Zhou Tao predicted steel prices in the Chinese market will decrease 20 percent to 35 percent in 2009 with industry profits declining 11 percent to 32 percent.

Consolidation is considered the best way coping with the situation.

Shandong Iron and Steel Group inked an agreement last November with privately owned Rizhao Steel, which is also based in Shandong province. If the deal is completed it will be the largest consolidation between a State-owned steelmaker and a private steel company.

When global steel markets were booming most mergers were pushed forward by government efforts in restructuring the industry. Now that markets are gloomy it is small players that are taking the initiative in realigning.

"We have been looking for acquisition by a stronger rival since November 2008," a senior official with a privately owned steelmaker said in Caijing magazine.

Jiangsu Shagang said some small and medium-sized steel companies visited the company asking for acquisitions since steel prices dropped sharply in the second half of last year. The prices they offered were sometimes less than a year earlier.

The government expects the industry to become more competitive and is supporting the steel sector's restructuring. A stimulus plan published by the State Council, or the Chinese Cabinet, in January encourages realignment between businesses.

The government wants to foster several globally competitive large-scale steel groups with production capacity of 50 million tons a year each and the top five steel groups will likely account for 45 percent of the country's total capacity.

Major State-owned steelmakers, such as Baosteel, Angang Steel and Wuhan Iron and Steel Group, are expected to take the lead in consolidation this year.

Government institutions, including the Ministry of Industry and Information Technology, the National Development and Reform Commission and the Ministry of Finance, are working on measures to support the move.

Industry insiders warned steel companies are facing problems figuring out exactly how to consolidate different branches after acquisition.