Challenges for China's Steel Industry: Overcapacity and Production Fragmentation

China's steel production reached 500 million metric tons in 2008. The growth of the steel sector has benefited from the rapid economic development and strong domestic demand. However, it is facing two challenges: overcapacity and production fragmentation. First, for long-term sustainable development, domestic steel enterprises will have to put a cap on their production output. Second, China's steel industry is perhaps the most fragmented in the world. The lack of production consolidation results in duplicated development and cut-throat competition among domestic steel enterprises. Most of these steel firms suffer from weak competitiveness and low production output. The steel industry is big, but not strong. Mergers and acquisitions (M&A) are the key strategy for the development of China's steel industry.