Analysts say the timing of the proposed deal is particularly good for Mittal Steel Co, as overcapacity racked up through years of frenzied investment has hammered domestic steel prices and could have made acquisition targets cheaper.
And it could apply pressure on smaller rival Arcelor S.A., which is locked in negotiations to try and buy a chunk of Laiwu Steel Corp Ltd, a mid-sized mill in eastern China.
"The move could also help speed up the Arcelor and Laiwu negotiations, as foreign giants are eager to get a head start," said Liang Mingchao, an analyst with Tianxiang Investment Consulting.
Luxembourg-based Arcelor, the world's number-two steel firm, is said to be close to a deal to buy into Laiwu, which is based in Shandong province.
If it goes through, Mittal's latest deal would be its second major investment in a Chinese mill. Baotou, a mid-sized mill based in the eponymous Inner Mongolian industrial city, has annual capacity for 7 million tonnes of steel and is targeting 8.5 million tonnes next year and 10 million tonnes by 2007.
"Mittal wants 49 percent of Baotou, but we haven't reached any agreement on that," an executive with Baotou told Reuters on condition of anonymity.
Mittal this year took 36.7 percent of Hunan Valin Steel Tube & Wire Co Ltd, the listed arm of China's eighth-largest mill, for about $310 million -- a price that equated to the firm's book value.
"It's too early to put a price tag on the Baotou deal, as talks are still in the initial stages," a source close to Mittal told Reuters.
Unlisted, state-owned Baotou had assets of 35.1 billion yuan ($4.35 billion) as of the end of 2004 and recorded sales of 21.5 billion yuan in 2004, according to its Web site (www.btsteel.com).
Mittal's shares traded on the New York Stock Exchange fell 0.92 percent on Tuesday.
The steel giant was also tipped to be interested in buying 49 percent of Kunming Iron and Steel Group in southern Yunnan province. Executives with Kunming Steel said they had talked with Mittal, but negotiations fell through over unspecified disagreements.
China's steel output has boomed alongside rapid economic expansion, and could grow 25 percent this year to 340 million tonnes, according to government figures. The world's biggest steel mills from Arcelor to South Korea's POSCO are now exploring opportunities to tap that demand.
However, steel prices in the country -- which consumes a quarter of global steel and is the world's biggest producer of the metal -- have fallen a fifth on average since April after peaking at a decade high in March, reflecting a growing domestic glut.
"They (multinationals) are betting on the long term," Liang said. "The market potential is still there, even though prices are getting soft."