STEEL FOR DAILY LIFE: A tourist visits a model kitchen mainly made of stainless steel in the exhibition hall of Taiyuan Iron & Steel Group Co. Ltd. in north China's Shanxi Province (FAN MINDA)

Last year, fixed-asset investment in China's steel industry reached a record high of 511.1 billion yuan ($81.13 billion), according to the MIIT.

According to Deng, domestic demand for steel is 500 million tons and the real production capacity is 690 million tons.

"Domestic steel industry faces a serious overcapacity problem," Deng said.

What has made the steelmakers feel even more gloomy is the fact that 80 percent of the production capacity is concentrated in plain product types, including deformed steel bars, wire rode, medium plate and hot rolling plate.

Before 2000, the Shanghai-based Baosteel, China's largest steelmaker, was the only producer of automotive steel sheets, but today, at least seven companies could produce the same product and more steelmakers are vying to make inroads into this field.

"Steelmakers should be encouraged to develop their own advantageous product types and avoid swarming into the same products," said Luo Tiejun, Deputy Director of Raw Material Department of the MIIT.

Unclear prospects

"An increase in steel demand in March was expected and steel mills are eager to lift prices after producing at marginal profits or making losses over the past few months," said Hu Zhengwu, an analyst with Beijing-based industry consultancy Custeel.com.

The price hike will make the business operations of Chinese steelmakers easier, said Hu Yanping, another analyst with Custeel.com.

Industry insiders, however, said that there were no grounds for optimism.

"In 2012 the steel industry will face an even more severe test—weak demand will make the supply-demand gap even wider and high prices of raw materials like iron ore will continue to put pressure on profits," said Zhu Jimin, Chairman of Shougang Group based in north China's Hebei Province.

For Deng of Wusteel, the hardest time for China's steel sector was not this year.

"I think China's steel sector will go through tough times for the next at least five years. On one hand, steelmakers have to face mounting costs; on the other hand the slowdown in economic growth will make many industries wane. Hope for making profit is very slim," Deng said.

In order to rally the steel industry, the Chinese Government plans to increase the proportion of the output of the top 10 steelmakers from 48.6 percent to 60 percent through merger and acquisition during the 2011-15 period.

"The consolidation of small steel enterprises will help them survive the hard times, avoid disordered competition and optimize product structure," said Zhang Lin, an analyst with Beijing Lange Steel Information Research Center.

The fragmented industry is also blamed for China's vulnerable position in international iron pricing negotiations.

"It is hard for numerous Chinese steelmakers to present a unified voice in international negotiations with the major iron ore suppliers," said Wang Shoudong, President of Taishan Steel Co. Ltd. in east China's Shandong Province.

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