SCMP reported that the mainland's chronically oversupplied steel sector will take years to restore balance in the demand supply equation and this will come about from bankruptcies of privately owned firms, amid weak demand and prices, tighter pollution controls and stringent credit conditions.

Sharp falls in the prices of raw materials such as iron ore and coking coal helped boost the steel sector's profits in the first half of the year but analysts said that until local governments showed they were serious about curtailing overcapacity, the industry would only be marginally profitable at best.

Ms Vanessa Lau analyst of Sanford Bernstein said that "China is still many years away from addressing overcapacity the government is closing excess capacity in order to tackle environmental problems, rather than trying to help the economics of the steel sector."

After visiting steel mills and local government officials in Tangshan, Ms Lau said that industry figures suggested only 500,000 tonnes of capacity in small plants had been mothballed, a drop in the bucket compared with the city's shutdown target of 40 million tonnes by 2017 accounting for 30% of its capacity.

Tangshan accounts for half of Hebei province's steel output, which in turn counts for about a quarter of the national total. Better profitability has encouraged large plants to lift output with their blast furnace utilisation rate rising to 97% from 86% in March.

Medium sized and large steel mills tracked by the China Iron and Steel Association posted a combined net profit of CNY 7.48 billion up 133% YoY. Still, the net profit margin was a meagre 0.41%. Excluding non core operations, they racked up a loss of CNY 660 million in steel related operations.

The association said that the difficult conditions would persist due to weak demand, excess capacity, tight credit supply and rising environmental protection costs. H1 domestic steel consumption grew only 0.4% mainly due to a fall in property construction investment growth to 14.1% from 20.3% in the same period last year.

The H2 demand outlook was not good, weighed down by a 16.4% fall in new home construction starts adding increasing trade disputes could crimp exports. Construction accounts for just over half of steel demand. The industry is estimated by the Ministry of Industry and Information Industry to have 200 million tonnes of excess capacity, or a fifth of the total.

Mr Paul Bartholomew, the managing editor of industry publication Platts, expected this year's new blast furnace capacity addition to fall to between six million and 10 million tonnes from 24 million tonnes last year. The capacity-cut target set by Beijing for last year was 10 million tonnes. Margins have improved, but they are still very meagre, so the incentives for new capacity are definitely waning.