China’s steel market has quickly become the world’s largest, and demand is set to soar during the next decade. Yet the country’s steel producers are in poor shape to take advantage of their homeland’s boom. Fragmented, uncompetitive, unprofitable, heavily in debt, and geared to the wrong products, they are losing out to imports.

But all is far from lost. Given steel’s strategic importance, the Chinese government is intent on remaking the industry to achieve international competitiveness. In addition to vigorously pushing for the industry restructuring that is needed to restore profitability to the main producers, which are still predominantly state owned, Beijing is forcing them to go to the private sector for the money they desperately need for growth.

Foreign and local private investors, as well as regional governments, have their eye on the booming demand, but many of them have decided to wait for additional restructuring before they act. To overcome the legacy of state planning, mills must shed their production quota mind-set and focus on what their customers want. Operational improvements to boost productivity and strategic alliances are required as well. Companies that move first have a chance to transform the industry and to become tomorrow’s leaders....