Experts say a market-based approach would need a system that allows firms to exit. If Beijing is unwilling to countenance mass bankruptcies due to concerns about job losses, it should at least make it harder for new firms to enter by breaking up a support structure in which they are cosseted with subsidies and cheap credit, they say.
"We've got 21,000 steel companies and there are still more being created every year," said Scott Kennedy, director of the Research Center for Chinese Politics and Business at Indiana University, who has studied China's steel firms.
"Banks shouldn't be giving those start-ups money."
The 30 largest listed steel firms are estimated to have racked up nearly 760 billion yuan ($124 billion) in debt, largely as a result of rapid expansions and high costs.
A Reuters survey of 15 listed firms, including market leader Baoshan Iron and Steel (Baosteel), showed that despite receiving 3.49 billion yuan in subsidies in 2012, they still made losses of 5.29 billion yuan over the year.
With Beijing increasingly concerned about local government debt, there is a growing understanding that cash-strapped regions cannot bail the sector out indefinitely.
"Reform is going to hurt, but not reforming will hurt more," said Jiang Feitao, policy researcher with the China Academy of Social Sciences (CASS).
Eoin Treacy's view As China's premier, Jiang Zemin made the
development of the steel industry a national priority. The pace of investment
surged and China had more spare capacity by 2008 than the entire industries
of some of its largest neighbours. This surge in steel production drove massive
demand growth for both coking coal and iron-ore. As China's focus migrates to
the development of a more consumer oriented society, the need to support such
massive heavy industry investment is becoming progressively less compelling.
Bao Steel has held a progression of lower rally highs since late 2009 and fell by almost 30% in June alone. It has held a progression of higher reaction lows since early July and a sustained move below CNY4 would be required to question potential for a further unwind of the oversold condition relative to the 200-day MA. However, the medium-term outlook is for lengthy base formation development.
The rationalisation of China's steel sector represents a potential benefit for steel manufacturers elsewhere since they will be able to compete on a more level playing field internationally. (Also see Comment of Day on August 14th for a review of European steel companies).
In the USA, Nucor (Est P/E 33.2, DY 3.16%) rallied impressively in July to test the upper side of its more than four-year base but encountered resistance near the psychological $50 level. A sustained move above that area will be required to confirm a return to medium-term demand dominance. US Steel has been trending lower since early 2010 and a sustained move back above $10 is the minimum required to question medium-term supply dominance. Allegheny Technology continues to encounter resistance in the region of the 200-day MA