The iron and steel industry lost nearly 700 million yuan ($114.7 million) in June, the first monthly deficit this year.

The combined first-half profits of members of the China Iron and Steel Association totaled only 2.27 billion yuan, with an average profit margin of 0.13 percent, the lowest among all industries, according to CISA.

However, the overcapacity problem isn't limited to traditional industries. Capacity in emerging sectors such as solar power and wind turbines has surged beyond demand, driving prices down sharply.

Media reports have said that Sinovel Wind Group Co, China's third-biggest wind-turbine maker, will close four of its international units, amid a slowing domestic market and overcapacity in the sector.

In April, Sinovel announced a 58-percent plunge in revenue for 2012, swinging to a net loss of 582 million yuan from a year-earlier net profit of 598 million yuan.

Oliver Barron, head of the Beijing branch of North Square Blue Oak Ltd, said that overcapacity fueled by local governments through approving large-scale projects to boost local GDP has persisted for years.

"The larger companies in these industries are great assets to local governments in terms of tax revenues, employment and GDP," he said.

"Local governments like to support them and arrange subsidies or cheap credit to expand their business."

Most of the capacity added in the electrolytic aluminum and cement sectors in recent years was built without approval, an investigation by the Xinhua News Agency found.