She said it was the toughest year for China's steel companies since 2012, when they suffered from high raw material costs and falling prices in the market.

The major steel companies, accounting for 80 percent of the country's total output, saw an overall profit of 1.58 billion yuan ($254 million) in 2012, a 98.22 percent drop from the previous year, according to the China Iron and Steel Association.

Zhang Changfu, secretary-general of the association, said it was "extremely harsh" that such a huge industry had achieved such low profits.

Steel sector still facing profitability problems

But the industry started to warm up over the past year, achieving a total profit of 22.89 billion yuan, said Li, of the metallurgical institute.

China imported 819.76 million tons of iron ore in the past year, a 10.3 percent increase compared with the previous year.

The average iron ore import price remained flat, at about $128 a ton.

But Li said prices of imported iron ore were still higher than domestic ones.

"Under such circumstances, giant iron ore producers have been swallowing the steel companies' profits," said Li.

He said China's steel industry is bound to face meager profits as it shifts to a slower, more stable growth model.

"Challenges are ahead," Li said. "The severe overcapacity problem in the industry caused vicious competition. The central government has been taking measures to cut capacities that cannot meet the environment standards."

Plus, he said, more rigorous environmental standards for production will bring higher costs directly to companies.

Rising costs for steel mills also will come from ongoing pricing reform of resources such as water, electricity and natural gas, Li said.

Li also said Chinese steel producers will face tougher trade protectionism this year as many countries want to protect their own industries, build employment and revitalize their economies.

In 2013, there were 17 cases of trading investigation targeting Chinese steel companies' exports.

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