Overcapacity sends China's steel sector into loss

The CISA said the association will cooperate with government departments to solve the overcapacity problem.

"No one wants to be the first to collapse," and said Li Xinchuang, deputy secretary general of the CISA, "but if the output can not be appropriately controlled, the mills with capital problems will fall into bankruptcy."

Analysts said that the steel sector has struggled for profit since late 2011, shrinking to 0.43 yuan for every ton of steel by the end of last month.

Based on CISA data, the average debt-to-asset ratio of its members stood at 69.47 percent in the first half of 2013, 1.4 percentage points higher from a year earlier, with some even hitting 80 percent, posing a more serious situation of capital chain tension.

The less competitive upstream businesses in the Chinese steel sector worsened the plight, as the iron ore monopolized by foreign countries declined much slower than the domestic steel price.

In June, the iron ore price slightly dipped 0.3 percent from the beginning of 2013, equating to a drop of about 30 yuan per ton, while the average steel price declined by about 280 yuan per ton, according to the Ministry of Industry and Information Technology (MIIT).

Meanwhile, stricter energy saving and emission standards required some steel enterprises to invest more in reducing pollution. Of 20 cities suffering most from air pollution in China in 2013, steel was produced in 17 of them.

The MIIT confirmed that the ministry and the National Development and Reform Commission, China's top economic planner, are currently working on a plan to eliminate outdated production capacity in the steel industry.