The inventories of the 80 major steel companies have reached a peak of 14.5 million tons, according to data from the China Iron and Steel Association.

"Chinese steel mills are able to produce 950 million tons of steel products annually, but their output last year was 717 million tons, which means a lot of capacity is staying idle. And once the prices of the products start to pick up, steel mills will compete fiercely. As a result, steel prices have smaller room to rise," said Wang Guoqing, a senior analyst at Beijing Lange Steel Information Research Center.

Zeng Jiesheng, another analyst at Mysteel.com, said it will take several years for the industry to recover from the current plight of low demand, disorder in competition and overcapacity.

During a slow market, it's extremely important for a company to have unique products, Zeng said, adding that Baoshan Iron and Steel Co Ltd's strength in car plates, for instance, allowed it to reach a substantial profit margin.

The Shanghai-based Baosteel, as the company is known, has maintained solid profitability, with its net income surging 41.1 percent year-on-year to 10.39 billion yuan.

Meanwhile, the industrial environment is improving from its nadir in 2012, and the government's urbanization and efforts to develop advanced manufacturing strategies will ensure steady demand for the steel industry.

Construction projects for the property and infrastructure sectors account for about 50 percent of the nation's total steel demand, and the rising investment from downstream industries will translate into improved demand in 2012, analysts said.

[email protected]