China's crude steel output rose 13.58 million tons to 169.9 million tons in the first quarter of 2011, an increase of 8.69 percent over the same period last year, causing experts to worry about the industry's future.

In a report released by the China Iron & Steel Association (CISA) on Friday, growth in China's steel consumption will slow over the next five years, with an average annual growth rate between 2.6 and 4.6 percent.

Excessive production and declining profits will bring unprecedented competition to the sector, as some steel makers will be eliminated while others will have to make changes in order to survive, analysts say.

Sales revenues of China's 77 large steel makers rose to 840.84 billion yuan ($129.38 billion) from January to March, of which profits accounted for only 2.91 percent. This is low when compared with the 6.2 percent average profit rate of the country's manufacturing sector, said the report.

"China's steel industry has become the country's least profitable sector," said CISA chief analyst Li Shijun, attributing the cause to oversupply.

The CISA data show that China's crude steel output reached a record high of 627 million tons in 2010 after the industry's average annual growth rate slowed to 12 percent from 2006 to 2010, compared to 22.6 percent from 2001 to 2005.

The CISA forecast that crude steel output would rise to about 768 million tons this year.

"Starting in 2005, we have been relying on exports to consume the surplus. But steel demand from outside the country is still down as the global economy recovers slowly from the financial crisis," Li said.

In addition to oversupply, production costs, especially prices of iron ore, have soared in recent years, he said.

China imported 177.17 million tons of iron ore from January to March this year, the price of which rose 62.62 percent over the previous year to $156.62 per ton, sending the industry's average production cost up 27.52 percent from the previous year, said the report.

"The country spent $24.85 million more on purchasing imported iron ore last year, which stood at 618.64 million tons," he said.

As China steps up efforts to reduce carbon emissions in its 12th Five-Year Plan period (2011-2015), it will also require higher energy-savings and environmental protection standards, which will in turn raise production costs for steel producers, said Zhang Shourong of the Academy of Engineering of China.

"Green energy and low-carbon production is inevitable for the country's steel industry. The government may soon launch a carbon tax. In that case, Chinese steel producers will have to pay 20 billion yuan more every year," Zhang said.

Yang Jianlong, a senior researcher at the Development Research Center with the State Council, echoed his views, saying that Chinese steel producers could no longer rely on expanding production to drive development.

Despite pressures to transform its production pattern, the Chinese steel industry still fosters huge potentials for further development, Yang said.

"Small steel enterprises may fail during the process. Larger steel enterprises could expand their businesses through mergers and acquisitions while exploring associated industries along the supply chain," he said.

Citing Wuhan Iron and Steel Group, China's major steel manufacturer, he urged Chinese steel producers to develop differentiated technologies and services for their clients.