China is taking drastic steps to save its struggling steel sector, which has been in the red due to weak demand and severe overcapacity from the country's rapid development.

The Ministry of Industry and Information Technology (MIIT) announced in July the first list of 74 iron and steel companies that must shut down outdated production lines. The second list, announced in August, involved two steel-smelting companies, as the country's economic slowdown has also led to weakening steel demand.

"The expansion impulse in the steel industry has stopped," said Wang Xiaoqi on August 21, deputy head of the China Iron and Steel Association (CISA).

Steel industry investment over January-June this year declined 7.08% from the same period last year to 237.5 billion yuan ($38.6 billion), the largest decline in investment among 19 major industries in the country, according to the association.

The association said the sharp drop in real estate investment for the first six months of the year greatly affected steel consumption, which grew 14.1% year on year, 6.2 percentage points less than the same period last year.

"Except for steel projects under construction, there will be no more new production capacity in steel refining, which means the overcapacity problem that has existed for a long time is beginning to ease," Wang said.

Over January-June this year, China consumed 376 million tonnes of crude steel, up 0.4% year on year, but Crude Steel output still increased 2.99% to 412 million tonnes, despite the government's efforts to cut crude steel output.

"It is a tough task to cut steel capacity. It requires firm determination by the government and the industry," said Wu Xichun, honorary president of the association, adding that most steel companies expanded production capacity even when they were already in the red.

Analysts said the way out for the steel industry is through mergers and acquisitions to form core competitiveness in the international market.