By Barbara Lewis
LONDON (Reuters) - European steel lobby Eurofer plans to raise concerns with the European Commission over Chinese group Jingye's proposed rescue of British Steel, saying the deal may flout rules on fair competition.
In what would be the first takeover by a Chinese company of steel mills in the European Union, Jingye said on Monday it had reached a provisional agreement to buy British Steel and promised to invest £1.2 billion over the next decade.
The deal, which requires regulatory approval, strikes at the heart of tensions between those in industry and government keen to embrace China as a major trading partner and those worried about the top steel producer's clout on the global market.
Some analysts have also voiced concern about handing China control of a strategic sector.
Eurofer said the planned purchase was a fresh instance of China exporting excess steel capacity to the edge of the European Union.
In an emailed statement, the European Commission said it was "in contact with the UK authorities".
The British government and Jingye had no immediate comment.
"We need to be sure there is no state aid contribution by the UK government which could be considered as not in line with EU state aid rules," Axel Eggert, director general of Eurofer, told Reuters.
Eggert said China, which makes about half of the world's steel, was the main contributor to a surplus on the global market.
The issue is weighing on the sector and added to the difficulty of agreeing a sale for British Steel.
Global overcapacity is 450 million tonnes per year, three times the size of the European market and China accounts for two-thirds or more of the excess, Eurofer says.
The industry body has led a push for tougher EU safeguards to protect the European industry from a flood of cheap imports.
China has always denied dumping steel at below cost price, saying its mills are more efficient than European ones.
Gareth Stace, director general of UK Steel, a trade association for the sector, which has shrunk significantly over the past decade, said in principle he welcomed Jingye's promise of long-term investment.
The rescue could save around 5,000 steelmaking jobs, mostly in Scunthorpe, northern England, and a further 20,000 in the supply chain.
The offer takes place at a pivotal time. Britain has said it will leave the European Union but has failed to get agreement on when and how.
The government has called a general election for December 12, in which a lack of opportunities in northern England is an issue.
China's Hebei Iron & Steel Group <000709.SZ> in 2016 signed a deal to buy a loss-making Serbian steel plant, also just days before an election.
Serbia is not a member of the EU, but is a candidate country, meaning it has to begin respecting EU rules.
Eggert said the Commission should have taken a closer look at the Serbian deal.
Since British Steel went into compulsory liquidation in May, the government has been responsible for a wage bill of around £250 million a year, sources close to the company have said.
The government has also lent British Steel around £120 million to enable it to comply with the EU Emissions Trading System.
(Reporting by Barbara Lewis; additional reporting by Foo Yun Chee in Brussels; editing by Emelia Sithole-Matarise and Jason Neely)