The news that China is going to create twin steelmaking champions by merging four of the biggest companies in the industry ought to be great for manufacturers worldwide.  Industries awash in excess capacity typically have deep-seated coordination problems that cause the major players to overproduce and drive down prices. It generally takes either mergers or bankruptcies to reverse that process—as Japan’s oil refiners or U.S. airlines would know. There’s a crucial caveat, though. While consolidation may often be necessary if you want to bring discipline to an unruly industry, it’s not always sufficient. Just ask Chalco. The aluminum giant has been on a more or less unbroken mission since it was founded in 2001 to rein in rampant overcapacity. Yet China has still produced more primary aluminum than it consumed in 150 of the 176 months Chalco has been in existence. 2013 market share of China’s top 10 steelmakers: 39% A similar pattern is showing up in steel. The government wants the market share of the top 10 producers to be no less than 60 percent by 2025, according to Bloomberg Intelligence. In practice, that measure has slipped from 49 percent in 2010 to 39 percent in 2013. The centerpiece of China’s latest reforms is the planned merger of Hebei Iron & Steel and Shougang, the two biggest steelmakers in the Beijing area. Hebei accounts for the lion’s share of production cuts of 100 million to 150 million metric tons outlined by Premier Li Keqiang in January. About 49 million metric tons will be sliced from the province’s output in China’s 13th Five-Year Plan through 2020, according to Bloomberg Intelligence’s Yi Zhu, rather more than Hebei Steel produces in a typical year. How’s that working out? Not so well: Steel production in northern provinces such as Hebei has soared to record levels so far this year, due in part to a post-Lunar New Year price recovery. In Hebei itself, output increased to an unprecedented 23 million metric tons in March, before climbing further in June in what’s normally a relatively quiet period for the industry. The region’s blast furnaces have been responding to demand from major steel-consuming sectors such as construction and transport, which ballooned during the first half before tapering in line with the country’s usual mid-year lull in industrial activity.  Perhaps Hebei’s boom is just a short-term reaction to the rise in prices? If so, it’s having worrying repercussions in longer-term decisions by mill owners. Fixed-asset investment has been climbing at its fastest pace since 2013, with private-sector investment up as much as 12 percent in April. That’s creating real capacity on the ground that will have to be digested for years to come. Optimistically, you could regard these hikes in investment as churn. If China is closing millions of tons of outdated steelmaking capacity, it may need to spend to replace some of those scrapped factories with new, lower-cost mills and furnaces. That appears to be happening with coal, which is being buoyed by rising prices as the pace of mine shutdowns runs ahead of government targets and leaves the market short. If that’s happening, it’s not showing up in Tangshan, the industrial city southeast of Beijing whose local steel champion was gobbled up in the 2009 merger that created Hebei Steel. The operating rate of blast furnaces in the city —a measure of output as a percentage of capacity— has been slumping since the start of 2015 and slipped to a five-year low in recent months. Given the surge in steel output, that looks suspiciously like mothballed facilities starting up again in response to higher prices. This dynamic shouldn’t come as a surprise. Chinese steel mills provide jobs, taxes, kickbacks and local pride to provincial and sub-provincial governments, factors that can be strong enough to counteract even edicts from Beijing. Turning this tanker around will be easier said than done. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.