China's push to clean up its heavily polluted environment and wring out excess industrial capacity is shaking up the heart of its steel country.

In the past two months, the local government in Hebei, a province roughly the size of Oklahoma that produces a quarter of China's steel, has orchestrated a parade of furnace shutdowns. The head of its top steelmaker has resigned. Mills are scrambling to switch to more fuel-efficient material.

Chinese leaders are telling the province that its measures aren't enough. Spurred in part by severe pollution that drifts from Hebei to next-door Beijing, the central government has set a goal of lopping off nearly a quarter of the province's steelmaking capacity.

What's going on in Hebei could affect global steel prices and will give an indication of Beijing's effectiveness in taking on powerful local interests.

China makes 43% of the world's steel. If Hebei and other provinces radically cut back output as Beijing asks, global prices could rise. If they don't, the weight of China's continued surplus capacity will keep dragging on steel prices.

China has close to a billion tons of steel-output capacity, though it uses only about two-thirds of that, according to official data. Even that is too much, analysts and officials say, and provincial governments gear up production whenever steel prices recover, swamping the market further.

Hebei is a template and a test for the central government's reach. Analysts say Beijing's policies are starting to show some effect. Crude steel output nationwide in November fell to its lowest level this year, official data showed. In Hebei, production declined 16% between February and November, compared with a rise of around 10% for the rest of China.

"For Hebei at least, the effects have been real," said Macquarie analyst Graeme Train.

Decades of unbridled steelmaking have taken a toll on Hebei's environment, primarily its air. Seven of China's 10 most polluted cities are located in Hebei, according to a Ministry of Environmental Protection report in September. Visibility levels in Hebei's southern cities are the worst nationwide due to frequent and intense haze, according to a study by Beijing's Institute of Urban Meteorology. In research published last year, Greenpeace said some 9,900 people in the Hebei-Beijing-Tianjin region of north China died in 2011 as a result of pollution from coal burning, a key input for milling steel.

Beijing's steel-industry officials say they are aware that local governments, reliant on steel revenue, often idle furnaces only for as long as needed to deflect the central government's attention. One said the furnaces Hebei tore down in November had in fact been long-closed, and didn't represent illicit active capacity. Hebei government officials didn't respond to requests to comment.

"We still have to wait before we see the real elimination of excess capacity," said Chi Jingdong, deputy secretary-general with the state-backed China Iron and Steel Association. "A lot of policies are still not in place and a lot haven't been fully implemented. We still haven't seen a satisfactory outcome in Hebei."

A big worry for the local government has been potential job losses that analysts estimate could run as high as 200,000 if all state-required capacity cuts are carried out. Assuaging labor problems has been a major hurdle in steel-industry consolidation. In 2009, the local government in neighboring Henan province was forced to halt a $38 million domestic merger after workers at Linzhou Iron and Steel Co. held mass protests fearing they would become unemployed. Earlier that year, workers at Tonghua Iron and Steel Group in Jilin province rioted and killed a manager who had threatened job cuts.

"The job losses in Hebei haven't really started yet because the government has so far focused on shutting facilities that have already been sitting idle for some time," said Yu Liangui, an analyst for Mysteel consultancy. "Eventually there will be job losses, but because the cuts will be spaced out over a number of years, the government is trying to make sure it's not socially destabilizing." China's Ministry of Human Resources and Social Security twice promised last year that it would ensure laid-off steel workers find new jobs, the official Xinhua news agency said. The government has also said it would allow new capacity if it produces higher-value steel and swaps out old, polluting furnaces.

Beijing put Hebei publicly in the crosshairs in September, when President Xi Jinping forced senior provincial party officials to undergo a Mao-era-style self-criticism session and then widely publicized the meeting.

During the session, unidentified cadres accused Hebei Party Secretary Zhou Benshun of "paying too much attention to economic growth," rather than the "quality of development," Xinhua reported. Mr. Zhou acknowledged he "chased short-term results" but now would "immediately implement economic system adjustments."