A rift is opening from within the Chinese steel industry as it maneuvers out of the economic downturn.

Manufacturers like Baosteel and Wusteel have kept their machines humming around the clock to fulfill soaring demands while smaller steelmakers struggle to make ends meet, according to a report by the 21st Century Business Herald.

With automobile and appliance markets gaining momentum, demand for high-end steel sheets is also on the rise. The surge has caused steel giants to raise their prices to increase profits.

Smaller manufacturers, however, are less likely to raise prices, fearing they may lose orders. Worse still, demands for their low-end steel bars, mostly used in infrastructure and housing construction, are shriveling as construction stagnates due to the chilly winter.

The fate of smaller manufacturers also hangs in the balance, as the government places stringent technology and output requirements for steel manufacturing in order to streamline the fragmented industry. The end result will be a number of small players being forced out of the market.

Zhao Xiang'e, a senior analyst with Shenyin & Wanguo Securities Co. Ltd., believes the industrial shakeout will prove fatal for smaller plants and a needed boon for larger ones to underpin their market foothold.

Luo Bingsheng, Deputy Chairman of the China Iron and Steel Association, said larger plants will solidify their advantages over competitors as government stimulus measures for the appliance and automobile industry continue into 2010.