SHANGHAI — Privately owned steel mills now account for just over half of Chinese steel production, which poses a challenge for any serious move toward industry consolidation.

Private mills produced about 362 million tonnes of crude steel last year, 50.5 percent of the country’s total output of approximately 716.54 million tonnes, Shen Wenrong, founder and president of Shagang Group, China’s largest privately owned steelmaker, said at the opening ceremony for the Small and Medium-sized Metallurgy Enterprises Chamber of Commerce.

The growth of private-mill production from around 35 percent of total output in 2005 and 46.6 percent in 2011 was driven by greater relative spending on new capacity and the fact that private mills generally were more profitable than state-owned producers.

This trend will make it more difficult for the Chinese government to increase industry concentration. "Only when private mills are running at a loss will they be interested in merging," a Beijing analyst told AMM sister publication Steel First.

The profit of 79 major private steelmakers averaged 55.4 yuan ($8.90) per tonne last year, and as high as 70 yuan ($11.30) per tonne for mills in Hebei, Shandong and Shanxi provinces, Shen said.

However, the overall profit margin for China’s steel industry averaged only 2.6 yuan (42 cents) per tonne, according to the China Iron and Steel Association.

"About 60 to 70 percent of China’s steel capacity expansion was made by private mills," a second Beijing analyst said, adding that it was hard to determine how much of the capacity was officially sanctioned.

The country’s National Development and Reform Commission, the Ministry of Industry and Information Technology and 10 other ministries set out guidelines in January aimed at accelerating consolidation of nine industries, including steel, aluminum and rare earths (amm.com, Jan. 29).

A version of this article was first published by AMM sister publication Steel First.