Top executives from both sides have reached a consensus on how to restructure the company, according to a source.

"They have agreed on how to run the company after the takeover, but are not ready to make the plan public," said the source. Earlier media reports said five State-owned enterprises - Anshan Steel, Sinosteel, Wuhan Iron & Steel Group, Baosteel and China Minmetals were in talks with Anyang Steel on a possible takeover.

Liu Jingyuan, a spokesman for Anshan Steel, however, said he was not aware of the development.

Sinosteel, China's largest iron ore trader, and Minmetals, China's largest metal trader, had denied plans to take over Anyang Steel. Wuhan Steel and Baosteel could not be reached immediately for comment.

"For large mills, Anyang Steel is a tempting target, with enormous advantages in the local market," said Xu Xiangchun, chief analyst with consulting institute Mysteel.

Xu said big steel mills in China are expanding capacity in line with the government's consolidation plan for the fragmented sector.

The central government came out with a stimulus package for the steel industry in January 2009, and encouraged big mills to merge with rivals to create cohesive steel groups. The government also said it would strictly control steel making capacity as oversupply problems have weighed on prices and squeezed profit margins.

With the government planning to withhold approval for new projects, steel mills have no other option but to join forces, Xu said. Anyang, the biggest steelmaker in Henan province, is seen as a prime target for large steelmakers, he said.

Henan State-owned Assets Supervision & Administration Commission (SASAC) had earlier said it was in contact with several large State-owned enterprises regarding Anyang Steel.

"Anyang has fewer advantages in terms of transportation as it is located in the central region, and is also being squeezed by steel mills from neighboring Hebei province," said Xu, adding that the backing of a large steel mill would give Anyang more room to develop.

Anyang Steel produces a mixed ratio of flat sheets and long sheets, while Anshan Steel only produces high-value added products like flat sheets. Anyang's long sheet products would fill the gap for Anshan Steel in the market for low value-added products, he said.

Anyang Steel has an annual production capacity of 10 million tons. It posted a loss of 303 million yuan in the first nine months of 2009, compared with a profit of 965 million yuan in the year ago period.

Its total assets were 26.9 billion yuan as the end of September 2009. The company reported revenue of 16.7 billion yuan in the first nine months of 2009.

Wang Ziliang, chairman of Anyang Steel, estimates that the company would post revenue of 32 billion yuan and profit of 1 million yuan for 2009.