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By Erin Prelypchan
SHANGHAI, Dec 23 (Reuters) - China's largest steel maker, Baosteel, said on Monday it is ramping up production to meet booming demand from the car industry, building two new plants and eyeing a joint venture with Japan's Nippon Steel .
Baosteel , the flagship Shanghai-listed unit of the world's fifth-largest steel maker, said it would spend at least 12 billion yuan ($1.45 billion) on two plants that would supply China's burgeoning auto industry with raw materials.
It also expects to clinch a deal in the first quarter with Nippon Steel, to build a plant in Shanghai to make high-quality steel sheets for foreign carmakers. Japanese media have said that project could be worth up to $1 billion.
"China needs the best technology and the highest quality steel products to supply foreign carmakers with what they need," Ai Baojun, president of Baoshan Iron and Steel Co (Baosteel), told a news conference. "Right now, we're the only company that can provide high quality steel sheets for carmakers in China."
Rising incomes and lower car prices are driving an unprecedented boom in Chinese auto demand, with annual car sales surpassing the one million mark this year for the first time.
Japanese firms like Toyota , Honda and Nissan are stepping up their presence in the country in an effort to cash in on the growth and compete with other foreign carmakers, such as Volkswagen and General Motors .
Baosteel and Nippon Steel have been cooperating since 1978, and in November said they were in talks to make steel sheets for Japanese car makers in China.
Ai said an alliance with the world's third-largest steel maker would offer Baosteel a chance to upgrade its technology.
"We could see the result of the negotiations in the first quarter of next year," he said. "Given the state of the world economy and steel industry, we believe that the cooperation could be mutually beneficial," Ai said, without elaborating.
ACCESS TO NIPPON CLIENTS
Analysts said relationships with Nippon's key clients would be attractive to the Chinese steel maker.
They saw natural synergies between a backward Chinese steel industry seeking foreign expertise, and sophisticated overseas players seeking new markets amid a global economic slowdown.
"China relies heavily on imports to meet its demand for car steel plates as it produces very little of such products for high-end sedans," said steel analyst Wang Quanmin of China Southern Securities.
"Meanwhile, foreign steel producers, such as Nippon Steel and POSCO , are eager to seek cooperation with major Chinese counterparts to strengthen their competitiveness in the world's fastest growing auto market," he said.
Baosteel's Shanghai-listed A shares closed at 4.19 yuan on Monday, down 0.01 yuan. Nippon Steel's Tokyo shares were untraded due to a holiday in Japan.
Baosteel said construction on the two new plants began on Monday and should be completed in 2005. One would make heavy steel plates and the other cold rolled steel for carmakers, appliance companies and construction materials.
There were no immediate plans to raise funds for the expansion plans, Ai said.
"We have enough cash to finance our growth plan. We don't plan to raise any more funds right now, but for a long-term development, we can't exclude the possibility of adjusting our equity structure," he said.
(US$1 = 8.280 yuan) (Additional reporting by Lu Jianxin)