Russia's second largest steelmaker, Severstal OAO (CHMF.RS), called for governments and steelmakers worldwide to consider cutting steel production on a large scale in order to lift the global steel industry out of its current doldrums of excess production capacity.

The global steel industry is operating about 78% of its full production capacity over the first nine months of the year with about 65% of all large steelmakers generating negative cashflow in the last two years, according to data from the World Steel Association and McKinsey & Co., respectively.

"The current situation is not sustainable," billionaire businessman Alexey Mordashov, CEO and largest shareholder of Severstal told the Wall Street Journal in an interview. If steelmakers and governments fail to take action now, "five years down the road, the industry is going to struggle severely...You can't cover average return on investment for many years without consequences."

Some of the world's largest steelmakers have already cut back production capacity and begun to layoff workers as a result of weak demand, particularly in Europe. ArcelorMittal (MT) the world's largest steelmaker shutdown production capacity in Belgium and France, while Tata Steel Ltd. (500470.BY), Europe's second largest steelmaker, announced plans to layoff 500 workers in the U.K. last month.

Mr. Mordashov called on steelmakers and governments to start talks aimed at cutting global steel production in a similar way to how the aluminum industry cut back global aluminum production in 1994. At that time, the European Union, the United States, Russia, Norway, Australia and Canada, all agreed to cut the equivalent of 6% of the world's total output. The agreement "preserved the development of the industry for more than a decade," Mr. Mordashov said.

The global steel industry is currently grappling with 25% excess production capacity, according to a Severstal presentation. That figure should naturally fall over the next five years as global steel demand grows at a faster pace than production, Mr. Mordashov said, citing a McKinsey & Co. study. The study forecasts capacity utilization rising to 80% by 2018 based on such trends resulting in more stable steel prices that could possibly start to rise if capacity utilization reaches 84% to 85%, he noted.

Mr. Mordashov, however, cautioned that China's support for such an agreement would be "absolutely essential" in order for it to succeed and such an agreement would have to take into consideration anti-trust laws. China is the world's largest steel producer, accounting for about half of the world's production, and is set to add 60 million to 80 million tons of additional production capacity this year even though Chinese steelmakers are struggling to generate a profit, he said. The additional production capacity "doesn't help resolve the problem."

Mr. Mordashov said he sees room for consolidation in the global steel industry, driven by mergers rather than cash acquisitions. He noted that such mergers could create companies with more flexibility to adjust production to lower demand. For instance, a company that has 10 blast furnaces as opposed to just one can temporarily idle furnaces without less impact to its bottom line than a single-furnace steelmaker. At the same time a larger steelmaker is able to more efficiently allocate capital investment among its steel products.

Mr. Mordashov said that such consolidation would be driven by synergies and added that Severstal is likely to participate in that consolidation trend although it doesn't intend to be a leader of that trend.