Shougang Group, China's eighth-largest steel maker, is seeking a controlling stake in State-owned Tonghua Iron & Steel Co in order to expand capacity.

"Shougang is working on the deal, but we cannot release any details until it's finalized," said Wu Jianxin, director of Shougang's communication's department.

Shougang struck a deal with the owner of Tonghua - Jilin State-owned Assets Supervision and Administration Commission - and agreed to pay 2 billion yuan to take a controlling stake in the company, China Business newspaper reported yesterday, without naming the source.

Shougang's Wu said he is not aware of an agreed upon price but confirmed that they are in acquisition talks.

According to the newspaper, several dozen Shougang officials went to review Tonghua's facilities on Jan 6 and were greeted with a banner reading: "Welcome Shougang to reconstruct Tonghua Steel", according to China Business.

Tonghua, the largest steel maker in Northeast China's Jilin province, has again become a merger target following a failed take-over bid by privately owned Jianlong Heavy Machinery Group due to employee protests last July.

Tonghua, which has 50,000 employees, has been struggling to turn a profit in recent years, making it a prime target for restructuring by its owner, Jilin State-owned Assets Supervision and Administration Commission.

Beijing-based Jianlong attempted to buy a controlling stake in Tonghua in 2005, but pulled out after learning of its heavy losses.

After years in the red, Tonghua turned a profit in June 2009, propelled by the government's 4-trillion-yuan stimulus package. It was that change in Tonghua's outlook that prompted Jianlong to reconsider its plan to buy a controlling 65 percent stake in Tonghua last July. That deal was abruptly halted when workers from Tonghua beat to death Chen Guojun, the new general manager parachuted in by Jianlong to run Tonghua.

Chen was allegedly attacked after infuriating workers by saying he would lay off most of the existing Tonghua workforce.

Industry insiders say the Shougang takeover of Tonghua is in line with its expansion strategy.

Shougang, which merged with three domestic steel makers last year, plans to expand its annual production capacity to 30 million tons by 2012. The company vows to do that by launching new projects and acquiring mills.