China's steel production capacity is likely to peak in 2016 as capacity is eliminated, gradually outpacing additions, Fitch Ratings has predicted.

The rating agency expects China's steel production capacity to increase to about 1.17 billion tonnes in 2015 from 1.15 billion in 2014.

In 2016 and 2017, annual new capacity of around 16 million tonnes will be added, although this will be offset by shutdowns of plants with total capacity of 75 million to 85 million tonnes over the next five years, resulting in capacity peaking in 2016, Fitch reported.

The Chinese government has been at pains to digest production gluts from an investment boom spawned by generous subsidies that pushed producers into "favored" sectors, including steel, over the past few years. The sectors expanded rapidly with little regard to real market demand.

Data from the country's top economic planner showed crude steel production dropped 2.1 percent year on year to 608.94 million tonnes in the first three quarters.

Fitch believes that future capacity elimination in China will mainly be driven by market forces rather than regulations.

Most of the regulatory measures implemented have already forced out smaller players and the plants that remain in operation are larger in comparison and comply with existing policies. Stricter environmental standards could also cause financially weak steel producers to shut down because they will not be able to afford the required investments, according to Fitch.

For Chinese steel producers who are struggling with oversupply and falling prices, they will need to invest in research and development to facilitate manufacturing of higher-value-added products, the agency said.

• [Editor:penny]