Sluggish demand at home is driving up the chronic supply surplus at China's steel mills to critical levels and is set to drive down global prices, analysts warn.
"Chinese authorities will be slow to react to the over-capacity," E&Y's global mining & markets leader Michael Elliott told CNBC by phone. In the meantime, "steel prices will remain low for the next five years, until the global industry consolidation starts to take place," he said.
For a decade, China's mostly state-owned steelmakers have been supplying the country's building boom with more steel than it needed, while steel prices nearly halved during the same period.
Now, with the economy growing at the slowest pace in six years and demand shrinking at home, the excess capacity is hitting critical levels, although China's steel mills have shown few signs of slowing down production.
The level of excess capacity may be as high as 30 percent according to E&Y, and little relief is in sight on the domestic front: demand for steel in China contracted for the first time in a decade in 2014, falling by 3.3 percent on-year, and is set to drop by 0.5 percent on-year in both 2015 and 2016, according to World Steel Association (WSA) forecasts.
"The need for consolidation has been recognized for some time and the government has set targets for capacity closure in the past," Capital Economics' Caroline Bain said in a report on Tuesday. "However, production (and losses and debts) just kept on rising," she said.
Too much steel everywhere
Beijing's record on keeping to its reduction targets is not entirely stellar, in part because the state-owned steelmakers are major local employers.
The government has just recently pushed back its target date for restructuring and consolidating the steel industry by ten years to 2025, according to E&Y's Elliot.