The State Council has approved the merger of two of China's largest steel producers, Baosteel and Wuhan Iron and Steel. This clears the way for what will be the largest steel company in China and the world's second biggest steel producer. How will the merger reshape the country's steel industry?

Prior to Baosteel's acquisition of Wuhan Steel, the Shanghai company had already acquired Xinjiang-based Bayi Steel and Guangdong-based Shaoguan Steel. While that was going on, Wuhan Steel was acquiring the smaller steel producers Echeng Steel, Kunming Steel, and Liuzhou Steel. Experts say that now the merger of Baosteel and Wuhan Steel should result in a major reduction of excess capacity, since Baosteel and Wuhan Steel produce quite similar products.

"Both Baosteel and Wuhan Steel produce high-end steel products like silicon steel and steel used in automobiles. So the two companies together will wind up with more of a market share. The merger will help them rationalize their production," said Zhang Chenliang, senior analyst of Mysteel.com.

Chinese steel exporters have been suffering from high anti-dumping duties from other countries, as foreign governments try to protect their local companies from cheaper Chinese imports. Last month, China saw only some 900 million tons of steel products exported overseas, a decline of 7.4 percent year-on-year. After Baosteel and Wuhan Steel's merger, their combined 60 million ton capacity will become the second largest in the world, right after the European steel giant Arcelor Mittal.

"I think the merger will be positive for Chinese steel makers in terms of competing with foreign peers. China's steel exports have encountered headwinds, as trade barriers emerged due to price competition in low-end products sold to overseas markets. After the merger, the new company will have more say in pricing. Then there will be no more price competition, just an issue of product quality," Zhang said.

Baosteel and Wuhan Steel both had outstanding performances in the first half of 2016. Baosteel earned 3.4 billion yuan from January to June, the highest among all steel markers in China. Wuhan Steel had profits of 270 million yuan during the same period. According to China Business News, the two companies do not plan job cuts as a result of the merger.