China said this week the country’s GDP grew by 9.1% in the third quarter from a year earlier, among the best growth rates in the world. Industrial production climbed by 13.8% during the period.

Yet if China’s economic growth rate is so good, why is its steel industry, the world’s largest, is such trouble?

Much of the industry will suffer losses in the last quarter of the year, according to Lan Jie, an analyst at Industrial Securities in Shanghai. “That might continue into the second or three quarter of next year,” he said today in an interview. That’s already hit shareholders in China’s biggest steel companies hard. Hong Kong-listed Angang Steel has lost 64% so far this year; Shanghai-listed Baoshan Iron & Steel is off by 17% and Wuhan Iron & Steel has lost 17%; and U.S-traded General Steel Holdings has tanked 59%.

The answer isn’t so much on the demand side of the business. Demand for crude steel will probably total about 660 million metric tons in 2011, a rise of about 10% from last year. That’s less than the increase in GDP because of soft business in real estate, equipment, machinery and autos, Lan says.

A bigger problem, as in many other government-backed industries in China, is oversupply. Crude steel production this year may reach 700 million metric tons, compared with 628 million metric tons last year, putting downward pressure on prices, Lan said. With more capacity than they need, big Chinese steelmakers of late have been shutting down factories for what they say is maintenance.

Besides excess capacity, falling prices for iron ore, a key raw material, are hurting makers. After footing higher costs during the commodity boom to the iron ore industry’s big three – Rio Tinto, BHP, and Vale, prices have been falling lately. That is squeezing steel industry net profit margins that at 2.9% last year were already relatively thin compared with 6.2% for all Chinese state-owned industrial companies.

For steel manufacturers abroad worried about the possibly of Chinese dumping – just this week an American industry group took aim at China’s solar industry, rattling U.S.-listed Chinese solar shares such as Trina and Suntech — Lan says the country’s makers aren’t likely to be looking abroad for relief due to policies that keep the industry focused at home. Yet that isn’t going to be any comfort to owners of Chinese steel shares.