China's steel production capacity and output have grown rapidly since 2002. Last year, domestic crude steel capacity reached 1 billion tons, compared with only 800 million tons of demand, according to a report of Sublime China Information Group Co, a commodities consultancy.

It said China's crude steel capacity will reach 1.07 billion tons by the year's end.

Wu Xichun, honorary president of the association, said that steel production capacity expanded quickly after 2008. But only 67 percent of the newly added capacity was actually used.

He said most steel companies expanded production capacity even when they were already in the red.

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"It is a tough task to cut steel capacity. It requires firm determination by the government and the industry," he said.

Rapid expansion and overcapacity have caused many of those steel companies to suffer losses.

"Ten years ago, a sales department head at a small steel company could earn a lot of money under the table because he was empowered to choose buyers," said an official at a steel company in Hebei province, China's biggest steel producer, who declined to be named.

At the time, supply fell short of demand, and there were often lines of buyers outside a steel company waiting for a contract. But steel companies are now having trouble finding buyers even after offering huge discounts, the official said.

Qu Xiuli, deputy secretary-general of the association, said steel companies must be aware of the potential risks in the capital chain.

She said the steel companies' expenses increased and receivables grew in the first half, requiring the companies to strengthen their capital management.

The association's data showed that steel companies' receivables rose 13 percent in the first half and that large and medium-scale steel companies saw a total loss of 660 million yuan.

Zhang Lin, a senior researcher at the Lange Steel Information Research Center, said the way out for the steel industry is through mergers and acquisitions.

China has thousands of steel companies, many of which produce similar products and compete by lowering prices, Zhang said.

"The number of China's steel companies should be cut in order to form core competitiveness in the international market," she said.

Under the background of a gloomy market, mergers will allow both buyers and sellers to strengthen their advantages, according to Zhang.