China's largest steel firm, Baosteel Group Corp, and smaller rival Handan Iron & Steel Group will sign a deal today to jointly build a 19.4 billion yuan (2.5 billion U.S. dollars) plant in China's north, a Handan official said.

But the official, who refused to be named, wouldn't confirm a China Business News report that the two partners will each take a 50 percent stake in the project. Baosteel, which had earlier asked for a controlling stake, declined comment.

The plant, to be located near Handan Steel's existing plant in Hebei Province, will produce annually five million tons of products with high added value like auto steel and sheets. Construction of the plant will be competed in 2010.

There is a shortage of these products in China, and sales from the new plant could surpass 60 percent of Handan Steel's total when construction is finished, according to a note by Chen Jinren, a Huatai Securities analyst.

"Handan Steel has to seek some strategic partners to join hands for such a plant which requires a higher technology standard," Chen said.

A partnership with Baosteel could also help Handan Steel benefit from Baosteel's marketing channels for auto sheets, analysts said.

The new plant is among a few projects which were approved in China over the past years even as the government started to curb rapid expansion of steel capacity amid an industry consolidation. China also encourages domestic mills to merge.

Baosteel has tried to increase holdings in Handan Group's listed unit, Handan Iron & Steel Co. But the effort was thwarted after Handan Steel's state-owned parent bought shares in its listed arm.

The new Handan project would become Shanghai-based Baosteel's second cross-region investment this year after it bought control of Xinjiang Bayi Iron & Steel Co.

Assets in the new Handan plant belong to Handan Iron & Steel Group rather than its listed unit Handan Iron & Steel Co. Huatai's Chen said the assets could be injected to its listed arm as early as 2009.

Baoshan Iron & Steel Co, Baosteel's listed unit, surged 4.72 percent to 11.98 yuan while Handan Iron & Steel Co fell 1.33 percent to 8.19 yuan Wednesday on the Shanghai Stock Exchange.