The Chinese government is encouraging steel companies to sign long-term contracts with coal and downstream steel consuming companies while improving their product quality.

The measure, set out in a document issued by five ministry-level bodies, is aimed at stabilizing recently fast growing steel prices and further cutting the industry’s overcapacity.

The document, jointly released by National Development and Reform Commission and other four ministries, said that although progress had already been made to cut overcapacity in the steel industry in recent months, the elimination of outdated capacity remains a major challenge.

Despite the rapid rise of spot and future prices for steel in the short term and the recent recovery in output and sales performance of steel companies, companies should carry out further efforts to reduce capacity to support economic growth, as the country’s oversupplied steel sector has experienced years of plunging prices and factory shutdowns due to a sluggish economy, it said.

Analysts said despite the surge in steel price since the beginning of this year, the supply-demand situation has not changed and the government document aims to stabilize the market and prevent steel price from overheating and disproportionately rising.

According to Wang Guoqing, director of the Lange Steel Information Center, despite the surging steel prices, steel inventories remain high.

Figures from the center released that the total inventory of steel in 29 major cities in China exceeded 12.39 million metric tons as of Feb 10, a 35 percent increase compared with three weeks ago, surpassing the peak of 2016.

The construction steel saw the biggest growth, more than 8.31 million tons as of Feb 10, 50.8 percent higher than three weeks ago, it said.

The government needs to ensure that cutting overcapacity proceeds as planned, he said.

According to Huatai Futures, considering the current stable increase in steel output and off-season demand, the inventory for steel in 2017 is believed to exceed 18 million tons, the highest of the past three years.

China’s crude steel output rose slightly last year, with crude steel production increased 1.2 percent year on year to 808.37 million tons in 2016, compared with a 2.3 percent decrease in 2015, according to the National Development and Reform Commission

China plans to reduce steel output by an additional 100 million tons to 150 million tons by 2020. Its 2016 target to cut 45 million tons was achieved ahead of schedule.

China will enact stricter rules for trimming steel overcapacity in 2017 after making significant progress in 2016, according to experts.