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Nippon Steel Corp. said Wednesday it is negotiating with Shanghai Baoshan Iron & Steel Co. over the construction of a plant in China that would produce sheet steel for automobiles.

“It is true that we are negotiating with Shanghai Baoshan, but it has not yet come to a conclusion,” Nippon Steel said in a statement.

Total capital outlays by the two steelmakers may exceed 100 billion yen, sources close to the talks said.

The firms are discussing a proposal that would see Nippon Steel acquire an equity stake in Shanghai Baoshan.

The firms are debating the issue of whether the Chinese government would allow a foreign firm to acquire an equity stake in one of its state-run companies, the sources said.

The firms want to reach an agreement by the end of the year, they said.

Nippon Steel and other Japanese steelmakers want to meet demand in China for high-quality sheet steel that is ballooning as Japanese, U.S. and European automakers expand production in China.

The firms have yet to finalize how the cost of building the plant would be shared, although Shanghai Baoshan would probably acquire a majority stake, the sources said.

The companies plan to build the plant for galvanizing cold-rolled steel sheets in Shanghai, with the intention of starting production in fiscal 2005.

Nippon Steel has previously landed a Shanghai Baoshan order to build facilities to add zinc to the surface of the cold-rolled sheet steel for automobiles.

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