In 2015, China produced about 804 million tons of crude steel, but only 664 million tons of steel products were consumed last year, according to the government-led agency China Metallurgical Planning and Research Institute.

"China has an annual capacity of making about 1.15 billion tons, but only about 800 million tons are produced each year," said steel researcher Qiu Yuecheng. "The utilization rate is less than 70 percent."

"There are simply too many companies making steel," said an industry insider, who declined to give his name.

Prices for steel also fell to 1,500 yuan per ton in 2015. In its heyday, steel prices fetched a staggering 5,600 yuan per ton.

Member steel makers of the CISA suffered losses of 64.534 billion yuan in total in 2015, the association announced in February. Many steel makers have even become "zombie companies" - businesses that make no money and but are kept alive only with aid from the government and banks.

Finding a way out

As urgency for change mounts, authorities are taking action to tackle the obsolete capacity.

In Hebei, for example, authorities will slash steel capacity by 40 million tons by the end of 2017.

The State Council said that no new steel projects will be licensed, outdated plants will be closed, and "zombie" companies eradicated.

As for the workers made redundant, many companies have chosen to "relocate" their employees.

In northwest China's Xinjiang Uygur Autonomous Region, for instance, the 65-year-old Bayi Steel Company has set up a public cleaning and security company to digest more than 2,000 laid-off workers who were relatively old and not skillful enough for other jobs. Female workers have been turned into cleaners while males became security guards.

It also seeks to upgrade by investing in a green building company, which helps boost the sales for high value-added products, and creates sales jobs for young and capable steel workers.

To cushion the effect of job losses on families and society, the central government will allocate 100 billion yuan over two years to help the laid-off workers find new jobs.

The process to cut overcapacity won't be easy, said Li Xinchuang, head of the China Metallurgical Planning and Research Institute. Li said that the United States, Japan and Europe spent decades tackling overcapacity, but "our task is much more challenging.

He added that China should encourage the development of competitive companies "with the ability to compete on the global stage."

"Cutting capacity might cause some economic pain," Li said. "But it will be pain worth having, in the long run."