China is trying to push its two biggest aluminum businesses together as part of a planned shake-up of state-owned enterprises (SOEs), industry sources said, a move that would create the world’s largest aluminum maker. Power company State Power Investment Corp (SPI) is in talks to hive off its aluminum assets to Aluminum Corp of China (Chinalco), allowing SPI to focus on power construction and generation, three industry sources told Reuters. The consolidation is shaping up as a test of Beijing’s ambitions to restructure its vast but underperforming state-owned sector, particularly at a time of slowing economic growth. If successful it would be a fillip for reform, but slow progress in what is seen as a relatively simple tie-up underscores the problems China faces in more challenging SOE consolidation, such as merging rivals in the same industry. “Merging SOEs is going to be very difficult and will involve a lot of problems that could cause damage to the harmony of society,” said Guo Chunqiao, a macroeconomic analyst at the state-backed research firm Antaike, referring to potential job losses. SPI, which inherited the loss-making aluminum assets when it was formed from the merger of two SOEs in June, wants to abandon the sector, which is suffering from a supply glut, the sources said. Shifting the assets would boost Chinalco’s capacity to more than 7 million tonnes a year of primary metal, making it the world’s biggest producer, ahead of Russia’s Rusal (0486.HK). But while talks have been going on for the past two months, progress has been slow, with one stumbling block being Chinalco’s reluctance to take over high-cost smelters, said a source familiar with SPI. China’s State-owned Assets Supervision and Administration Commission (SASAC), which manages SOEs on behalf of the central government, was considering the issue and would back the move if it did not dent Chinalco’s profits, the sources said. A Chinalco spokesman declined to comment on the issue, while SPI was not immediately available for comment. BROADER REFORM China vowed in late 2013 to restructure its huge and debt-ridden state sector and remove SOEs from competitive sectors where private firms were being crowded out. Total profits at central government-owned state firms fell 4.5 percent in the first seven months of the year to 1.005 trillion yuan ($157 billion) from the same period a year earlier, according to Ministry of Finance data. The move is expected to cut the total number of central government-owned SOEs from 111 to around 40, say media reports, and is aimed at eliminating duplication, waste and “cut-throat competition” between firms with nearly identical business structures. However, the release of a reform masterplan has been repeatedly delayed, with SASAC researcher Li Jin telling local media this week it had to balance and coordinate “conflicts” between government departments and enterprises. Senior executives have said the masterplan could come shortly. “We have reason to believe that the central government will issue policies related to state-owned enterprise reform soon,” Dai Zhihao, the general manager of Baoshan Iron and Steel Corp (600019.SS), told an investor briefing on Tuesday. POTENTIAL MERGERS While only two big SOE mergers have been announced so far this year - SPI and the CRRC Group, which was formed from two regional railway firms - rumors have swirled around every sector that more are to come. Chinalco, whose aluminum business is mostly managed by its listed arm Chalco (2600.HK) (601600.SS), has also been linked to China Minmetals Corp. Officials told Reuters in January that China’s two biggest nuclear reactor builders, China National Nuclear Corp (CNNC) and China General Nuclear Power Corp, were merger candidates, although CNNC’s chairman said it was not yet “on the agenda”. Media reports have also suggested China’s two biggest coal firms may be merged, while large steel enterprises like Baosteel and Wuhan Iron and Steel (600005.SS) could also be targeted. A senior Baosteel official, however, has warned about the risks of creating “huge monsters” in the sector, saying mergers would only work if they were accompanied by capacity cuts. Merger costs would also be very high, said Jiang Feitao of the China Academy of Social Sciences, who studies the steel sector. “Only market-driven restructuring will improve the steel sector’s overall efficiency, and any strong administrative push will not help,” he said.