SHANGHAI (Reuters) - China’s top steelmaker China Baowu Steel Group, formed in a mega merger last year, has its sights set on more deals with smaller smelters amid a government drive to consolidate the market, the official China Daily reported on Thursday.

China is driving a major campaign to rationalize its sprawling state sector from steel to energy as it looks to reduce overcapacity and increase state control of key markets.

“We are going to integrate more steel companies to obtain an advantageous scale effect,” Chen Derong, general manager of Baowu Steel, told the newspaper. “We are now actively contacting some target companies for further mergers.”

Baowu Steel was formed by a merger between Baoshan Iron and Steel Group (Baosteel) and its smaller rival Wuhan Iron and Steel, which was formally completed in December last year.

The merged group is the world’s second-biggest steelmaker, behind only ArcelorMittal ISPA.AS.

China aims to put at least 60 percent of the nation’s steel capacity in the hands of its 10 biggest firms by 2025, and has encouraged acquisitions and mergers in the industry for years.

“Being a state-owned capital investment company, China Baowu’s output capacity is expected to reach 20 percent of the country’s total through M&A,” Chen added.