Shandong Iron and Steel Group, the world's eighth largest steel maker, is suffering a setback in its proposed takeover bid for Rizhao Iron and Steel Group over differences in the terms of the deal.
Du Shuanghua, the founder of Rizhao Steel, one of China's most profitable non-State steel mills, is employing delaying tactics against the purchase of a 67 percent stake in the company, according to people familiar with the situation.
In addition, Du was likely to consider moving to another province to restart his steel empire, according to insiders at the company.
The acquisition, which was expected to be pushed through as early as this week, was still under discussion and would probably be finalized next week or by the beginning of September, a senior executive at Rizhao Steel told China Daily.
Another source said the protracted talks are related to the financial terms of the deal. Shandong Steel's acquisition is not thought to be all in cash. Instead, the company is expected to inject assets such as modern equipment in return for a controlling stake.
Du tried to protect his interests in the consolidation by handing up to 30 percent of Rizhao's core assets to Kai Yuan Holdings, a Hong Kong-listed company in January.
Although Rizhao Steel is attempting to fight the acquisition, it has to weigh the repercussions of not cooperating with local authorities.
Officials from the local environment watchdog visited Rizhao Steel recently and asked the company to stop production using two boilers, on the grounds the facilities were not in accord with environmental standards, the source from Rizhao Steel said.
A senior official of neighboring Hebei province talked to Du recently, suggesting he should move back to Hebei, where he was born and started his business making steel tubes, the source said.
The consolidation is part of a plan by the Shandong provincial government to build a quality steel production base in Rizhao city with annual capacity of 20 million tons.
Rizhao and Shandong Iron and Steel signed a letter of intent for consolidation in early November. But the deal broke up after Du moved 30 percent of his stake to Kai Yuan Holdings.
"The Shandong provincial government aims to build a large steel group that can compete on the world stage," said Yu Liangui, a steel analyst from Mysteel. "The steel industry wants to develop a steel industrial zone along the coastline. Rizhao has an advantage over Laiwu Steel and Jinan, in terms of regional position.
"If Shandong Steel has to establish a new factory in Rizhao in response to the government's plan to build a quality steel production base in Rizhao, it will be in a disadvantageous position if it is facing competition from Rizhao Steel."
China, as the world's largest producer and consumer of steel production, is at a disadvantage in the annual international iron ore negotiations because of its limited presence in the industry.
The government wants the steel industry to consolidate, with large steel mills leading the exercise.
Du established Rizhao Steel in the city of Rizhao in 2003. Now the steel mill produces 8 million tons of crude steel annually and contributes one third of GDP to the city.
The Hurun report listed Du as China's second-wealthiest person last year, with a 35-billion-yuan fortune.
When most Chinese State-owned steel mills suffered heavy losses, Rizhao reported a net profit of about 1.8 billion yuan in the first half of 2009, while Shandong Steel, which has three times the capacity of Rizhao, reported a loss of 1.3 billion yuan.