During the mainland's Great Leap Forward in the 1950s, chairman Mao Zedong urged the people to set up backyard steel smelters.
Those days have not entirely disappeared. Today's steel plants, with the exception of the big state-owned giants, are numerous, primitive and scattered about the country.
The strategic weakness of what is supposedly a pillar of the mainland economy has been made glaringly obvious during the recent bargaining over iron ore prices, where steelmakers were disappointed in the price cuts they managed to extract during a serious global downturn.
Despite being the world's largest steel producer, the mainland has little influence on global iron ore prices because of the fragmented nature of the industry.
'There are too many steel mills in China, and each one has its own interests. How could they bargain with big global iron ore suppliers with monopolistic advantages?' said China Securities steel analyst Wang Zhe.
In Japan and South Korea, a few big steelmakers dominate the market, with more than 90 per cent of their iron ore bought through long-term contracts with mining giants BHP Billiton, Rio Tinto and Vale.
By contrast, producers in China's highly fragmented steel industry must rely on the more expensive spot market for iron ore.
The country, which produced about 500 million tonnes of crude steel last year, has more than 1,200 steel mills. And its top 10 players control only about 45 per cent of the market, despite government efforts to consolidate the sector over the years.
If the disappointing price cuts for iron ore were not enough, tensions over the negotiations have spilled over into a major diplomatic incident for Beijing.
Last week, Chinese authorities accused Rio employees, including Stern Hu, an Australian national and head of iron ore operations on the mainland, of stealing 'state secrets'.
China is the world's biggest iron ore buyer, accounting for about 50 per cent of global seaborne trade. But it has been eager to have a larger say in iron ore contract negotiations in the face of rising demand for the steel-making ingredient.
That could be achieved if the government slashed the number of ore importers and let one or two companies handle the trade, Mr Wang said. But such industrial restructuring would be time-consuming and difficult.
Major Chinese steel mills agreed this week to a less than expected 33 per cent cut in benchmark prices. That price, also accepted by Japanese and Korean mills, means that the global Big Three - Australia's BHP and Rio, and Brazil's Vale - have effectively won the pricing battle once more.
While the detention of the four Rio employees accused of stealing state secrets by bribing executives of mills and trading firms is officially unconnected from the price negotiations, it has not stopped speculation it is a retaliatory move to bully Rio into accepting bigger reductions.
The China Iron and Steel Association (Cisa), the mainland's lead negotiator on the pricing of iron ore imports this year, had demanded as much as a 45 per cent cut in this year's prices and insisted that the talks continue beyond the June 30 deadline. The mainland's top steelmaker, Baosteel Group, previously led the industry at the annual talks.
In addition to its strong stance, Cisa has increased its scrutiny of the iron ore market by ordering the Rizhao International Iron Ore Trade Centre, the country's first iron ore trading platform, to stop dealing in imported ore. It is also focusing on regulating the imported ore market, as reselling and speculative trading have been blamed for hurting China's position in the talks.
Industry sources said Cisa was reviewing the steelmakers to see which should have their import licences cancelled.
This is not the first time Beijing has tried to play hardball by cutting the number of importers.
More than 520 firms were engaged in importing iron ore before a licensing system was adopted in 2005, with the new regulations immediately slashing the number to 118. In 2007, that was cut to 112, including 70 mostly state-owned big steel mills and 42 trading firms.
Although licensed importers are only allowed to sell ore at contract prices plus an agent's fee of 3 to 5 per cent, some are now trying to cash in on the industry's growth by selling to unlicensed steel mills.
Between 2001 and last year, domestic crude steel production grew at a double-digit pace, with total output more than tripling to 500 million tonnes from 151 million tonnes. Last year's output accounted for 38 per cent of the world's total.
Inevitably, China's reliance on imported ore has also surged, and it has to import about half the material it consumes. Imports rose to about 440 million tonnes last year from 208 million tonnes in 2004.
The hefty demand for iron ore provided opportunities for licensed importers and a myriad of middlemen to profit from selling ore on the spot market, where prices are usually higher than contract prices.
Under the arrangement, trading companies and steel companies with excess inventory sell their contract ore to middlemen for a 30 to 50 per cent gross profit margin. The middlemen in turn sell the ore to steel mills on the spot market to earn another fat profit.
According to some estimates, licensed steelmakers could have made profits of 20 billion yuan last year by selling contract ore to the middlemen.
To ensure sustainable gains from trading contract ore, steel mills and trading firms strive each year to increase their contract volumes. Mills without licences also try to line up licensed importers in order to secure a stable supply of the raw material.
The big money to be made on the iron ore spot market has encouraged corruption.
'A more stringent qualification requirement for licensed importers and a further reduction in their numbers could help restore stability,' said Xu Xiangchun, chief information officer at Beijing Ganglian Maidi E-commerce, a steel data provider.
Mr Xu has advocated that steelmakers join hands to buy spot iron ore from overseas suppliers, as bulk purchases might yield a bigger discount.
The Big Three, which control about 70 per cent of the global seaborne ore trade, supply both contract ore and spot ore, while ore suppliers in India and South Africa only sell on the spot market. Spot sales now account for about half of the mainland's imported ore.
Despite China's growing share of global ore consumption, Mr Xu expected the country to continue to struggle for more clout in pricing, as the Big Three could sway prices through controlling output.
This year's price talks between China and ore producers began in January and extended past the June 30 deadline without an agreement, becoming the longest-running in the 40-year history of setting annual prices for the steel-making material.
The 33 per cent drop in benchmark prices, the first decline in seven years, may sound substantial, but not when the near-fivefold compound price increase between 2003 and last year is taken into account.
The contract price for the benchmark Rio product was settled at about US$61 a tonne, excluding freight costs, for Japanese and Korean mills.
This year's dispute between China and iron ore suppliers is likely to signal an impending end to the decades-old benchmark pricing system, said Matt Robinson, an economist at Moody's Economy.com.
Steven Randall, managing director of The Steel Index, a London-based steel and iron ore information provider, also expects that the benchmark system will gradually be demolished and more ore will shift to the spot market or be based on a price index.
Indeed, the long-standing practice of suppliers and mills accepting whatever deal was first agreed was broken last year by Rio and BHP. The two Australian miners succeeded in getting an 80-95 per cent price increase in June last year despite Vale agreeing to a 65 to 71 per cent increase in February last year.
'When steel mills start negotiations for next year's prices, nobody expects everybody to sit down for only one price. Because we are now seeing benchmarks become unstable, nobody will lock in all its raw materials for a benchmark price, as that may be risky when spot prices fall,' said Mr Randall.
There are now reports that BHP is quietly pushing its own index pricing agenda with Asian customers.
In order for China to strengthen its say in global iron ore pricing, Su Jiangang, general manager of Anhui-based Maanshan Iron & Steel, said the country needed to speed up consolidation of its industry and iron ore market.
At the same time, the mainland should also study measures to boost development of its huge iron ore reserves to reduce its reliance on imports, Mr Su said.
Ganglian's Mr Xu said mainland companies had these options: increase their investment in overseas iron ore mining companies or diversify ore supplies to reduce their reliance on the Big Three.
Overseas mining investments might not only provide a more stable supply of the raw material but would mean mainland firms could also share in the profits if iron ore prices surged.