Jinan Iron and Steel Co., controlled by China's sixth-largest steelmaker, will buy most of sister company Laiwu Steel Corp. for 11.6 billion yuan ($1.7 billion) in stock, as the government drives consolidation in the industry.

The acquisition will more than double Jinan Steel's sales and boost profit by 69 percent, based on 2008 earnings, the Shandong-based steelmaker said in a statement to the Shanghai Stock Exchange. Both companies are controlled by Shandong Iron & Steel Group, which is owned by the provincial government.

China is encouraging mergers and acquisitions among steelmakers to help them compete globally and boost their bargaining power for raw materials including iron ore. The consolidation of Shandong Steel's listed units is taking place almost two years after the parent was formed in March 2008.

"The acquisition will make the retained Jinan Steel China's third-biggest listed steelmaker and improve its product structure," Luo Wei, a Shanghai-based analyst with China International Capital Corp., wrote in a note today.

This "also will lead to further consolidation among the mills of Shandong province."Jinan Steel rose 8.4 percent to 5.71 yuan in Shanghai trading. Laiwu Steel fell 5.4 percent to 12.37 yuan.

Jinan Steel will issue 2.3 billion new shares, valued at 5.05 yuan each, to units controlled by parent Shandong Steel, according to the statement. Other shareholders can opt for shares in Jinan Steel or cash, the statement said, without putting a value on the total acquisition cost.

Shandong Steel's production fell 2.4 percent to 21.3 million metric tons last year. Hebei Iron & Steel Group made 40.2 million tons as China's largest mill.