A slump in prices has come hand-in-hand with a surge in production for China's steel industry.

Prices on the domestic market have slumped by about 25 per cent in the first five months of this year. Production, in turn, is up 32 per cent from the same period last year, with the country's mills churning out nearly 165 million tons of steel in the first six months.

The central government's stringent measures to slow the property and investment sectors to head-off inflation have cut into the growth of steel demand.

As the trend develops, over-production may result in great damage to this large but weak industry, although price declines would ultimately hold back runaway production.

The release last Thursday of the blueprint outlining the next 20 years of development for China's steel industry is set to solve the problems and orient the industry towards international standards.

China's steel mills, which have logged an annual growth of 20 per cent since the beginning of the century, produced 272 million tons of crude steel last year, about a quarter of the world's total, keeping the country the largest steel producer in the world for eight years in a row.

However, the steel has been produced by about 1,000 mills scattered across the country, only 15 of which had an annual crude steel output of more than 5 million tons last year a level that can ensure a mill has economies of scale. Many of the mills are small and reliant on out-dated technology, wasting large amounts of energy and resources and producing serious pollution.

According to latest statistics, some 80 million tons, or 20 per cent of China's steel output, is produced by small or medium-sized smelters which do not meet the most recent standards.

China still needs to import high-alloy steel, which it cannot produce domestically because it lacks the necessary technology.

Large but inefficient, the country's steel industry has led to a number of derivative problems including weak competitiveness of individual enterprises, excessive investment, inappropriate industrial distribution, low quality of products and serious pollution.

Those problems not only impede the country's drive to cool down its inflation-charged economy, but also affect the sector's ability to compete globally. Without solving these problems, the sector will struggle to compete on the world stage.

Fresh is the memory of just a few months ago when China's steel makers had to agree with Hamersley of Australia and Companhia Vale do RioDoce (CVRD) of Brazil, two of the world's major iron ore providers, on a 71.5 per cent price hike arrangement for this year.

Had the country some big and powerful steel conglomerates, experts say, the domestic sector could have brought more negotiating muscle to the table.

Although implementation of the newly released blueprint will improve China's pricing leverage in the international market, the new policy is not a knee-jerk reaction to the current situation.

The 20-year scheme is part of the country's consistent efforts to consolidate the industry and strengthen the sector which is a major pillar of the national economy.

Despite its ban on foreign control of domestic mills, it is clear the policy package is focused on improving competitiveness and efficiency in the sector.

According to the plan, exports of low-end, energy-intensive products, such as steel alloy, pig iron, coke and steel scrap, will be discouraged. Export tax rebates on such products will be gradually reduced or wiped out.

The blueprint envisions that through merger and acquisition (M&A), the country's 10 largest mills will account for 50 per cent of steel output by 2010 and 70 per cent of nationwide production by 2020.

It is expected that two industry giants with an annual capacity of more than 30 million tons could be created by 2010 through M&As.

To accelerate their development, steel complexes are being asked to concentrate in the country's developed coastal regions, where steel demand is strong and ports are more easily accessible.

To save resources, expansion will be curtailed in northern China which lacks adequate water supplies, and northwestern China, where iron ore is scarce.

The State, according to the plan, will promote production of high-end, low-cost and less polluting steel products.

By 2010, steel mills are required to consume no more than 0.73 tons of coal and 8 tons of water for each ton of steel produced, and by 2020, 0.7 tons of coal and 6 tons of water for each ton of steel.

The restructuring measures are expected to improve the industry's efficiency and competitive edge encouraging the emergence of genuine global competitors from the world's largest steel producer and consumer.

Given the all-inclusiveness of the blueprint, the only worry for policy-makers is whether it can be strictly implemented. Predictably, we would not see fast results from the policy.

The effectiveness of the development plan will, to a large extent, hinge on the will of local officials to make mills cut production if they cannot meet the requirements of the plan. At a time when the interests of local governments and the country's heavy industry manufacturers are closely linked, it is unclear how fast the new industrial plan can be fully implemented.

Such scepticism is not unfounded. Consolidation and closures can bring benefits in the long term, but would seriously hurt local interests. Taxes, employment and gross domestic product figures are all career achievements for local officials.

Another factor will be State banks, whose local branches are often "blackmailed" by local governments and enterprises. Bank branches that lend heavily to local enterprises will not be happy to see any closures or mergers that negatively affect their balance sheets.

The new industrial blueprint, nonetheless, is a good start to properly manage the disorderly domestic steel industry and set it onto the right development track.

Central authorities need to display the wisdom and political will to ensure the development plan is unswervingly implemented.