* Nippon to double stake in Nisshin to up to 20 pct-Asahi * Nisshin eyes stake in top Japan stainless producer NSSC-Asahi * Nisshin shares close up 5.7 pct, Nippon Steel up 3.4 pct (Adds analyst comment)
By Yuko Inoue
TOKYO, July 16 (Reuters) - Japan's Nippon Steel Corp (5401.T) plans to roughly double its stake in Nisshin Steel Co 5407.T to up to 20 percent to strengthen the group's stainless steel business, the Asahi newspaper reported on Thursday.
Raising its stake to one-fifth would cost Nippon Steel about 20 billion yen ($212 million) at the current market price.
Shares of Nisshin, which expects a second straight year of losses due to weak demand and falls in chrome prices, jumped as much as 10 percent following the report, while Nippon Steel shares briefly rose nearly 5 percent.
Nippon Steel, the world's No.2 steelmaker, and Nisshin, Japan's fifth biggest and owned 9 percent by Nippon Steel, both said nothing had been decided on strengthening their capital ties.
Two sources of the companies, who were not authorised to speak publicly on the matter, said strengthening capital ties is one option for them but no decisions have been made.
Stainless steel makers have been suffering from tough market conditions because of volatile prices of nickel and chrome, the raw materials for stainless steel, and rising competition.
A collapse in demand amid the recession for car parts and household items like kitchen sinks and roofs forced many global players to suffer losses last year, though a recent recovery in demand and nickel prices has prompted South Korea's POSCO (005490.KS), one of the region's biggest players along with China's Baosteel (600019.SS), to raise output and prices.
The Asahi reported on Thursday that Nippon Steel would restructure and consolidate the group's stainless production facilities after raising its stake in Nisshin.
Nisshin will also take a stake in Japan's top stainless steel producer, Nippon Steel & Sumikin Stainless Steel Corp (NSSC), a joint venture between Nippon Steel and Sumitomo Metal Industries Ltd 5405.T, the Asahi said.
Market watchers have been speculating for years that Nippon Steel will likely raise its stake in Nisshin, a relatively small player in the global stainless steel market, and consolidate the business if issues regarding anti-monopoly rules are cleared.
Combined output of NSSC and Nisshin would likely account for about half of Japan's stainless steel market.
But some analysts were sceptical about the impact of such a deal.
"Doubling its stake in Nisshin to 20 percent won't change anything," said Yuji Matsumoto, an analyst at Nomura Securities Co. "They'll need more drastic measures if they want to shore up the business."
But one outcome of such a deal could be closer ties between Nippon Steel and Spain's Acerinox SA (ACX.MC), one of the world's biggest stainless steel makers owned 15 percent by Nisshin.
Acerinox and Nisshin are jointly building a cold-rolled stainless steel plant in Malaysia. The plant will come on line in 2011.
Hit by a plunge in demand and steep falls in nickel and chrome prices, Nisshin expects to post a second consecutive year of pretax losses this financial year. Its stock is trading at a price-to-book ratio of 0.67, considerably lower than its peers due to earnings concerns.
Nisshin shares closed up 5.7 percent at 186 yen, while those of Nippon Steel finished up 3.4 percent at 337 yen, outperforming the iron and steel subindex's .ISTEL.T 2.1 percent gain. (Editing by Chris Gallagher)