China's steel production hits record high in May

China's steel production hit an all-time high in May, according to official data released on Friday, even as surges in raw material prices, especially iron ore, have squeezed margins.

The world's largest steel producer produced 89.09 million tonnes of steel last month, up from 85.03 million tonnes in April and 81.13 million tonnes in May a year ago, according to the National Bureau of Statistics (NBS).

Average daily industrial metal output reached 2.87 million tons, according to official data, up from a record 2.83 million tons in April.

Steel production in China has been strong over the past year as the mills have taken advantage of strong domestic demand.

In January-May, China produced a total of 404.88 million tons of steel, up 10.2% over the same period last year, NBS data showed.

“Steel production will remain strong in the coming months, with softer production restrictions in major steel cities in the summer and expectations of strong demand from construction sites,” Jinrui Futures analyst Zhuo Guiqiu said ahead of the data release.

Tangshan City, China's main steelmaking center, has extended restrictions on heavy industry smog until the end of June, but factories due to leave the city will be exempted from the restrictions.

Utilization rates at Chinese steel mills nationwide were relatively high as of June 14 at 71.13%, according to data provided by consulting firm Mysteel.

However, the spike in iron ore prices due to supply disruptions has sharply reduced profit margins for steel mills, dampening prospects for further expansion of steel production.

According to data tracked by Jinrui Futures, the margin has dropped more than 50 percent in the past two months to around 350 yuan ($ 50.56) per tonne of rebar.

“Despite the sharp decline in profit margins, the mills are not planning to cut production at the moment as there is still some profitability,” Zhu said.

"But we still have to keep an eye on whether work at the steel mills stops due to short-term safety audits or environmental audits carried out by local governments in the summer."