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 Rizhao city 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.

(China Daily August 27, 2009)