China’s steel sector is burdened by massive overcapacity, razor-thin profit margins, even for the best performing operators, and a mountain of bad debt. The steel sector is also one of the single biggest contributors to air pollution that now regularly plagues Beijing and other Chinese cities. It therefore represents a prime battleground both in Beijing’s new “war on pollution” and the long-running war on blind investment. When the central government says it is targeting fixed-asset investment (FAI) growth of 17.5% this year, the slowest rate in 12 years, it cuts to the very heart of what has been the core driver of China’s steel expansion story. “You can basically say that Chinese steel output has reached a peak,” said Zhang Wuzong, Chairman of private steelmaker Shandong Shiheng Special Steel. But the official forecast is for the country’s steel production still to grow this year, albeit at a slower rate of around 3% compared with 7.5% last year. However, even the China Iron and Steel Association (CISA) is now starting to warn that national output will peak around 850 million tons. The country is estimated to have some 300 million tons of surplus capacity – perhaps more – almost twice the output of the European Union last year. Zhang Qingwei, Governor of Hebei province, home to 250 million tons of Chinese steel capacity and seven of the 10 most polluted cities, has threatened to sack any official responsible for even a ton of extra steel capacity this year. Hebei has agreed to cut production capacity by 15 million tons this year and by 86 million tons by 2020. The war will only intensify after Premier Li Keqiang’s warning that the smog in Beijing is “nature’s red-light warning against inefficient and blind development”, the South China Morning Post reports.