* New guideline targeting overcapacity in industry due soon
* Beijing needs to balance restructuring against job losses
* Uncertainty over even scale of industrial capacity
By David Stanway
BEIJING, June 26 - China is set to release new plans soon to slim down bloated industries from steel to shipbuilding, but applying measures on the ground will be tough after years of lax oversight during a stimulus-fueled rush to expand in Asia's biggest economy.
The new rules, which will also target aluminium, cement and glassmaking, could be announced within weeks. Despite fairly resilient demand, all these sectors have been hit by overcapacity and failure to rein in production gluts could put more pressure on already weak markets.
The global raw materials sector is buttressed by Chinese buying and while efforts to streamline industry could make the long-term outlook more sustainable, they might hit demand. Major sellers to China of iron ore, coal and other staples include Rio Tinto, BHP Billiton and Vale.
China's new government is trying to restructure key areas of the economy, including new efforts to rein in excess credit growth that has led to asset bubbles.
But in tackling industrial capacity Beijing will be wary of moving too fast to avoid social strife from excess job losses.
"Solving this problem is going to be extremely hard and it's going to take a long time, and you can't just expect everything to change with just one policy," said Li Xinchuang, deputy secretary general of the China Iron and Steel Association (CISA), which includes 80 mills accounting for about 80 percent of China's steel output and is involved in policy discussions.
Beijing has sought to tackle overcapacity in sectors such as aluminium and steel for about a decade, but plans have faltered due to resistance from local governments anxious to protect growth and boost revenues.
In a sign Beijing may be getting more serious, cutting capacity is becoming a performance target for local officials.
In the past, the central government tended to rely on quasi-governmental industry bodies like CISA, with limited formal powers to drive plans through.
There has been little economic or legal incentive for local authorities or enterprises to comply, and few formal regulations to determine what projects are legal or not.
The latest plan is likely to seek to block new projects, push for more mergers and acquisitions and raise targets to shut old capacity. China was previously committed to closing 7.8 million tonnes of outdated steel and 273,000 tonnes of aluminium capacity in 2013.
The plan will be supported by steps designed to cut air pollution in cities by closing or relocating heavy industry.
Beijing has already ordered regional authorities this year to take action against "blind expansion" by closing illegal projects, but analysts say it will be wary of causing job losses in industrial areas like Hebei surrounding the capital.
"They have a lot of heavy industry in Hebei - steel, cement, glassmaking - and if Hebei has economic problems the workers could flee to Beijing," said Henry Liu, an analyst with Mirae Asset Securities in Hong Kong.
China's steel industry, the world's biggest with a capacity to produce about 1 billion tonnes, is now estimated by CISA to have about 300 million tonnes of surplus production capacity, or around 40 percent of 2012 output.
Shipbuilding in China had by 2010 an annual production capacity that was equivalent to total world demand and has continued to grow even with a drop in construction and orders.
What is required, say some, is not new policies, but better implementation.
While Beijing has run inspection campaigns or issued orders to force provinces to shut down plants and push mergers, sectors like steel and aluminium have largely existed in a legal limbo.
Until the industry ministry published its first registries of approved steel and aluminium producers in March, even Jiangsu Shagang Group, China's biggest private steel firm and fifth biggest overall, had no authorisation to produce at all.
In the case of aluminium, the Nonferrous Metals Industry Association estimates there was more than 7 million tonnes of idle capacity last year, a third of China's output, and capacity is expected to reach 40 million tonnes by 2015, nearly double the 24 million-tonne target set in an industry five-year plan.
Industry sources said smelters have come under pressure to stop projects in the far northwestern region of Xinjiang, a centre for the aluminium industry, and that more than 10 million tonnes of new capacity could be blocked.
But while China has found it easier to control big projects by encouraging state-backed enterprises like Baoshan Iron and Steel to cut capacity before new projects are built, small private projects have proved harder to curb.
Beijing has said it will use new pollution and environmental standards to block construction of new industrial projects in major cities, and is eyeing targets to reduce coal use in some heavily polluted regions.
"If they can deal with this problem it can kill two birds with one stone. You can help improve the structure of industry and ease pollution," said Huang Wei, a Greenpeace campaigner in Beijing.
But it is hard even to estimate how much capacity there actually is, and therefore how much needs to be cut.
Hebei has said it aimed to cut total steel capacity by 60 million tonnes by 2020, but estimates of total capacity range anywhere from 300 to 400 million tonnes.
"The fact is nobody really knows what Hebei's exact steel capacity is right now," said Huang.