(Yicai Global) Oct. 20 -- Fosun International said it has agreed to sell a 60 percent stake the conglomerate has in Nanjing Iron & Steel United to China's biggest private steelmaker for as much as CNY16 billion (USD2.2 billion) to raise money to repay debt.

Under the deal, Shagang Group, which is also the world's fourth-largest steelmaker by capacity, will become the actual controller of Nanjing Iron & Steel, a Shanghai-listed firm under Nanjing Iron & Steel United, Fosun said late yesterday. State-owned Nanjing Iron & Steel Group owns the rest.

Shares of Fosun and Nanjing Iron & Steel resumed trading today following a week of talks on a deal. Fosun [HKG: 0656] rose 0.2 percent to close at HKD4.84 (67 US cents), retreating from an earlier gain of as much as 4.6 percent. After plunging 5.8 percent in the morning, Nanjing Iron & Steel [SHA: 600282] closed down 0.3 percent at CNY3.07 (42 US cents).

“Compared with building a new steel mill, it’s still relatively cost-effective for Shagang to buy Nanjing Iron & Steel United at this price,” Wu Wenzhang, chairman of steel and raw materials data provider SteelHome, told Yicai Global.

“As a steel company with a rich history, the firm's innovation, product development, and management capabilities are also something Shagang can benefit from,” Wu added.

Shanghai-based Fosun bought into Nanjing Iron & Steel United in 2003. Managed by the conglomerate’s smart manufacturing division, the steelmaker has an annual production capacity of 10 million tons of steel and 9.4 million tons of steel products.

Nanjing Iron & Steel United had contributed much to Fosun’s earnings in recent years, but as the steel industry entered a downturn this year, its earnings performance declined. In the first half, revenue at Nanjing Iron & Steel United fell nearly 10 percent from a year ago to CNY34.9 billion, while net profit plunged 34 percent to CNY1.5 billion.

The pressure on the steel industry has not eased in the second half. The market environment in the fourth quarter is not looking good, with steel demand likely to be stable or dip, said He Wenbo, executive chairman of the China Iron and Steel Association.

“At least 200 million tons of overcapacity needs to be removed to achieve a balance,” Wu said. “The steel industry may face a major adjustment in the next three to five years.”

Editors: Tang Shihua, Futura Costaglione