BEIJING, June 27 -- Two leading private mills in eastern China have formed a strategic partnership to cooperate on issues like iron ore imports, and the tieup could lead to a potential merger as the domestic steel industry undergoes consolidation.

Jiangsu Province-based Shagang Group signed a deal with Shanghai's Fosun Group over the weekend as both move to strengthen their competitiveness. The accord also allows them to cooperate in areas like purchase of raw materials such as iron ore, coking coal and steel scraps.

Their cooperation is also a sign that more privately run mills will form alliances via regrouping and restructuring to gain better market share in the domestic steel industry which is largely controlled by state-owned companies.

"That's a good way for the development of private players in the domestic steel industry as policies always favor government-backed mills," said Gu Yaoqiang, an analyst at Haitong Securities Co.

Analysts say the accord can help Chinese steelmakers wield some leverage in future annual contract ore price negotiations after China agreed last week to a 19 percent rise in prices.

China had resisted the 19 percent price jump, which was already accepted by mills in other countries, following a 71.5 percent hike last year.

"The agreed increase is sufficiently material to exert further downward pressure on margins and should help to accelerate the consolidation process among the country's steel producers," Fitch Ratings' Danny Chen said in a report last week.

Shagang, with annual steel production of 15 million tons, is located in Zhangjiagang, a port city along the Yangtze River.

Fosun, a retail-property-steel conglomerate, controls Nanjing Iron & Steel United Co in Jiangsu Province.

(Source: Shanghai Daily)