SHANDONG Iron and Steel Group, a state-owned mill in the east China's province, will buy control of a private-sector rival as the provincial government consolidates the steel industry.

Shandong Steel and Rizhao Steel Holding Group agreed on Sunday to form a new venture, according to Xinhua. Shandong Steel will pay cash for a 67 percent stake, with the amount to be decided after an evaluation of assets, Xinhua added.

Rizhao, founded and controlled by billionaire Du Shuanghua, will take the remaining 33 percent stake by injecting assets into the venture, according to a Hong Kong stock exchange filing yesterday by Kai Yuan Holdings Ltd, which owns stakes in three units of Rizhao.

The takeover is part of a plan by the provincial government to consolidate its steel industry, one of China's largest. Shandong Steel was formed by the merger of the state parents of Laiwu Steel Corp and Jinan Iron and Steel Co, both listed in Shanghai.

Kai Yuan had bought stakes in Rizhao's three units as Du fought to avoid the takeover by Jinan-based Shandong Steel.

"Rizhao has better profit margins than Shandong Steel's Laiwu and Jinan Steel units, and Rizhao will be Shandong Steel's most profitable segment after the restructuring," the Jinan Daily said.

The venture will build a new steel mill with an annual capacity of 20 million tons in Rizhao, a port city, according to Kai Yuan.

Rizhao produced 7.5 million tons of steel last year, according to the World Steel Association, while Shandong Steel produced 22 million tons.

The combination would boost Shandong Steel's output to be the third largest in China.