Lakshmi Mittal must be whispering thanks to Marius Kloppers, the BHP Billiton chief, for his plans to merge the miner with its rival Rio Tinto. The Kloppers project is not going very well - steelmakers in China and Japan are voicing loud protests about the risks of an iron ore cartel but for the chairman of ArcelorMittal, the world's biggest steel company, BHP's clumsy move is a political gift.

Mr Mittal is on the cusp of sealing a deal that could lead to the take over China Oriental Group, a Bermudan company listed in Hong Kong that owns steel plants in Hebei Province in northern China. Earlier this month, ArcelorMittal bought a 28 per cent shareholding in China Oriental from Diana Chen Ningning, vice chairman of of the company and China's richest woman and it now appears Mr Mittal has secured an option over another shareholding that could give ArcelorMittal control in the future. Ms Chen attempted a buyout of China Oriental last summer but failed to win support for her strategy of using China Oriental as a vehicle to consolidate the country's fragmented steel industry. The question is whether Mr Mittal will succeed where Ms Chen failed.

China is the biggest steel producer, its mills account for more than a third of global output but the Chinese industry is scattered with only two firms, Bao Steel and Tangshan among the world's top ten. The fragmentation is a weakness, not just in terms of operational efficiency but also in commercial clout. Steelmakers suffer two weaknesses apart from volatile product prices: they need abundant and cheap supplies of ore and energy. The price of iron ore and coking is increasing in leaps and bounds and for China, which has insufficient domestic supply, the nearest and therefore the cheapest source is Australia.

This is where BHP and Rio enter the frame. Together, they control the export of Australian iron ore and the Chinese steel industry is more than a little perturbed by the notion of two competing suppliers becoming one. But theirs is a position of weakness - hundreds of steel mills clamouring for a place in the queue for iron ore. Mr Mittal understands this well, his strategy from the beginning has been to achieve production scale and iron ore supply. Scale means operational efficiency and more pricing power. Steelmakers have suffered from consolidation among their big customers in the motor industry. Size also means better negotiating power with suppliers, such as the mining groups and Mittal has also been targeting mills with access to iron ore. Hebei is China's iron ore province.

China Oriental Group is listed in Hong Kong so ArcelorMittal should be able to take control without falling foul of foreign ownership restrictions but that is only the beginning. There can be little doubt that Mr Mittal has no intention of just owning one Chinese steel mill and the Chinese government must be aware of that. However, Mr Kloppers' initiative might just concentrate minds in Beijing and open the door a little bit wider.

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