BAOSTEEL Group Corp, China's second-biggest steel maker, is in talks to buy a stake in a steel unit of Malaysia's Lion Group for about US$1 billion, two people with knowledge of the matter said yesterday.

The size of the holding in Amsteel Mills Bhd to be sold has yet to be determined, one of the people said, declining to be identified because the negotiations are private.

Chinese steel mills, the world's biggest producers, need to target foreign markets to boost sales because of domestic oversupply. Malaysia's economy may expand 5 to 6 percent this year after growing 7.2 percent in 2010, its central bank estimates.

"Southeast Asian countries have a good projection of steel demand as economies grow and not much steel capacity," said Xu Xiangchun, chief analyst with researcher Mysteel.com.

Annual steel production capacity in Association of Southeast Asian Nations, may rise to 64 million tons by 2015 from 25 million tons in 2009, Xu said.

Amsteel operates two steel plants in Selangor, using electric arc furnaces and other facilities to make the alloy used in construction, automotive parts and machinery, according to Lion Group's website.

Baosteel, supplier of half the sheets used by car makers in China, will consider building plants in developing regions outside the country, Chairman Xu Lejiang said in March. The Chinese government is encouraging a shift of surplus steel production capacity overseas, Wuhan Iron and Steel Group's General Manager Deng Qilin said in the same month.

Steel demand in China, the world's biggest consumer of the alloy, may rise by as much as a quarter by 2015 compared with last year, according to a May projection from the China Iron and Steel Association, which represents producers.