Baosteel Group Corp and smaller partners launched their 35.9-billion-yuan (5.2 billion U.S. dollars) joint venture in Guangzhou on Saturday as they took a key step forward to restructure and consolidate the steel sector in Guangdong Province.

    Shanghai-based Baosteel has agreed to pay 28.7 billion yuan for an 80 percent stake in the venture, and two Guangdong-based mills, Guangzhou Iron & Steel Group and Shaoguan Iron & Steel Group, hold the remainder by contributing 7.2 billion yuan worth of assets.

    Baosteel Chairman Xu Lejiang said the domestic steel industry has entered a critical development period, as it is facing increasing competition by oversea major players and rising costs for raw materials such as iron ore.

    "So the domestic industry needs to change its growth mode," Xu said, adding the latest deal set a remarkable example for other cross-provincial mergers in the steel industry in the future.

    China has been encouraging consolidation of its fragmented steel sector, the world's largest supplying a third of the global total, to make mills more competitive, cut pollution and bolster efficiency. 

    Xu promised to support the Guangzhou and Shaoguan mills to improve their product structure, management and competitiveness. The new venture aims to build a major 10-million-ton-a-year steel plant in Zhanjiang, a port city in Guangdong, which will increase Baosteel's capacity by a third.

    Xu said he expects the government to approve the construction of the Zhanjiang plant as soon as possible.

    Baosteel plans to grow capacity to 80 million tons by 2012, with annual sales of more than 50 billion dollars and profit of over US$5 billion.