By Muyu Xu and Manolo Serapio Jr
BEIJING/MANILA (Reuters) - China's steel output surged to a record in May as mills ramped up production to chase fat profit margins, with a strong outlook for demand likely to keep mills running at nearly full capacity for the rest of the year.
The increased output comes despite China's efforts to limit production in key areas as part of its anti-pollution campaign and highlights Beijing's challenge in tackling overcapacity in the world's top steel producer.
China produced 81.13 million tonnes of crude steel last month, up 5.8 percent from the previous month and 8.9 percent from the same month last year, according to data from the National Bureau of Statistics. Year-to-date output rose 5.4 percent to 369.86 million tonnes.
Daily average output climbed 2.4 percent to 2.62 million tonnes in May from April, according to Reuters' calculations based on the offical data.
"Steel mills have been running full-load and adding scrap steel to increase output in order to cash in on strong margins," said Zhuo Guiqiu, senior analyst at Jinrui Futures.
Given firm demand and smog-battling production curbs in areas including the key steelmaking hubs of Hebei and Jiangsu provinces, analysts say mills can earn up to 900 yuan ($141) by producing a tonne of steel at present, not far from more than 1,000 yuan late last year.
The utilisation rate at steel firms across the country was above 71 percent from late May, a level last seen before winter production curbs which kicked in in October and lasted through March.
Recent environmental inspections in some 10 regions have forced some mills to cut production. But analysts do not expect the curbs to last long, unless new environmental policies add to pressure on supplies.
"Demand from downstream sectors may be better than expected," said Zhuo. "The market generally believes the infrastructure construction sector is more active in the second half than in the first half, which could lift demand for steel products."
Underlining firm demand, steel stockpiles at both mills and traders declined in May despite rising output, Mysteel consultancy data showed.
China's output has been increasing despite its closure of 255 million tonnes in steel production capacity in the past two years, including illegal induction furnaces.
That is part of Beijing's vow to address overcapacity that has dogged its steel sector for years.
Outside China, Chinese steel companies have built or acquired 13.5 million tonnes of capacity and are building an additional 8.6 million tonnes over the next few years, Morgan Stanley analysts said.
($1 = 6.3965 Chinese yuan)
(Reporting by Muyu Xu and Manolo Serapio Jr.; editing by Richard Pullin)