Three European steel companies - Arbed of Luxembourg, Usinor of France and Aceralia of Spain - have confirmed they are to merge.

The deal is set to create the world's biggest steelmaker, with output of 46 million tonnes a year, nearly double that of its nearest rival.

The combined group is expected to control 5% of the world steel market but its share of the European market will be much higher.

The three groups said in a joint statement on Monday they had agreed a share swap deal.

Aceralia shareholders will receive eight shares in the combined group for each seven held, Arbed shareholders will get 10 for each one share held and Usinor shareholders will get one for one.

Amazing

"The deal is amazing," said John Johnson, research manager at CRU International.

"They were all rivals but they culturally fit together well even though their operations do have some overlap. There will be rationalisation and that means job losses."

The European Commission said it had been informed of the planned merger on Thursday and was awaiting notification.

"The Commission may force them to shed in some areas," said John Johnson, research manager at CRU International.

"The greatest monopoly may be in coated sheet products (used in cars), where they could possibly control up to 60% of the market."

Industry pleased

A spokesman for the International Metal Workers' Federation said he hoped that the firm's different market strengths would allow the merger to be undertaken without widespread redundancies.

The three companies produce different types of steel products with the only overlap being in stainless steel, which is a growth area, the spokesman said.

But Francis Mer, chief executive of Usinor, warned that the merger would lead to job losses and factory closures.

"There will be job cuts. But it will be nothing like the major reorganisations seen in the 70s and 80s," Mr Mer told French newspaper Le Monde.

The firms aim to achieve cost savings of 300m euros in 2003, and 700m euros a year by 2006.

Furthermore, the merger will allow the shelving of 350m euros in capital investment spending by 2005, a statement on Monday said.

World leader

The merger, which is timetabled for completion this autumn, will create a group with sales of 30bn euros a year, employing 110,000 people.

In output terms, it will dwarf current sector leader Nippon Steel, which produced 28.1m tonnes last year.

Europe's current leader is ThyssenKrupp of Germany, followed by the Scandanavian group that is being formed from the merger of Outokumpu and Avesta Sheffield.

There has been increasing speculation about consolidation in the European steel industry British Steel and Dutch firm Hoogovens merged to form Corus.

Shares in Corus, which earlier this month announced the loss of 6,000 jobs, were up 5.4% on Monday, over hopes that cutbacks prompted by the mega-merger would support the price of steel.

Trading in Aceralia, Arbed and Usinor shares on major stock markets remained suspended.