Spain's Acerinox and Dutch company Aperam are in preliminary talks about a possible merger, they said, a move that could create a global leader in stainless steel and Europe's biggest producer.
Analysts said a deal, if reached, could face hurdles from European competition authorities.
"Discussions are at an early stage, and no agreement has been reached as to the scope, structure or terms of any possible transaction," Aperam said in a statement.
A tie-up could create a European player with capacity to make 2.3 mln tons a year, far more than current leader, Finland's Outokumpu with 1.4 mln tons, analysts at Jefferies said. It said a merged firm would also have leading position in the United States, South America and South Africa.
"The merged group would become one of the top worldwide stainless steel companies, and a clear leader in the United States and Europe," according to Banco Sabadell analysts.
Both Jefferies and Banco Sabadell expressed worry about regulatory difficulties in Europe.
Mirabaud analysts ruled out a green light from the European Union regulator without "major remedial actions" being ordered, saying that "this undermines the attractiveness of a long-term merger for Acerinox shareholders."
A purchase would need the Mittal family's support, given the Mittal family owns around two-fifths of Aperam, which was split out from ArcelorMittal in 2011.
It would also require the March family's support, as they own 18% of Acerinox through a stake.
The materials and information on this article have been prepared or assembled by Viet Nam Steel and are intended for informational purposes only