China steel drops again, traders unimpressed by output cuts

* CISA members cut output by 8.35 pct in late-Aug

* Iron ore prices drop again to lowest since Sept 2009

* China rebar, iron ore futures continue plunge

(Updates prices, adds trader quote)

By David Stanway

BEIJING, Sept 5 (Reuters) - China steel and iron ore futures

prices plunged to new lows on Friday and spot prices continued

to plummet, with traders unconvinced by data suggesting large

mills were finally taking action to curb oversupply in the

world's biggest steel market.

China Iron and Steel Association (CISA) figures showed that

large-scale firms slashed daily output by 8.35 percent in late

August, while steel product stockpiles also fell 6.6 percent

over Aug. 21-31.

But the figures did not provide immediate support for the

spot market, with traders in Shanghai reporting rebar prices of

2,810 yuan ($457.6) per tonne, down 20 yuan from Thursday, and

hot-rolled coil prices of 3,260 yuan per tonne, down 30 yuan.

"CISA's steel output figures also fell in the final third of

July and then went up again - we have to wait until early

September before we can be sure that production has really

dropped," said a Beijing-based trader.

The most traded rebar contract on the Shanghai Futures

Exchange fell 0.5 percent on Friday to another new low

of 2,834 yuan per tonne.

The most active iron ore contract on the Dalian Commodity

Exchange dropped 2.8 percent to end at 585 yuan per

tonne, with trade slow ahead of an extended public holiday

weekend.

"We are not expecting any pickup in momentum until

mid-September and (it is) certainly unlikely ahead of Monday's

(mid-Autumn festival) holiday," said Melinda Moore, an analyst

with Standard Bank, in an emailed note.

Steel oversupply has remained the primary concern, and CISA

has been urging its members to take action to curb production.

More obsolete, polluting capacity is also scheduled to close

this month as part of a state campaign.

According to CISA-affiliated consultancy Custeel, total

August steel output is likely to have reached 71.16 million

tonnes, a daily rate of 2.296 million tonnes. Custeel's

estimates are normally higher than official government data.

British steel consultancy MEPS said in a Thursday note that

there were still indications that Chinese steel mills were

underreporting output, and noted that it was difficult for

authorities to make "meaningful decisions" on capacity controls

unless they ensured that output data was reliable.

Benchmark 62 percent iron ore for immediate delivery into

China fell another 1.6 percent on Thursday to

$84.3 per tonne, its lowest point since September 2009. Prices

are down around 4 percent this week and are nearly 39 percent

lower than the same time last year.

Shipments continue to rise, with the world's fourth largest

miner Fortescue Metals Group of Australia announcing on

Thursday that its total August deliveries reached a new high of

15.16 million tonnes carried on a total of 82 vessels, breaking

the previous record of 13.25 million tonnes in June.

The Steel Index said in a note on Thursday that "the

additional tonnes have come at a bad time", with iron ore prices

coming under further pressure in early September as a result of

fresh rumours that domestic steel producers were suspending

operations or even facing bankruptcy.

The latest steel mill said to be at risk has issued a public

statement denying domestic media reports that it had suspended

all operations and begun bankruptcy proceedings.

Xicheng Iron and Steel Group in Jiangsu province said that

some of its machinery had been shut down but only because of

product quality issues. However, it admitted that China's credit

tightening measures had created serious financing difficulties

that it was now working hard to rectify.

CISA vice-chairman Zhang Changfu said in a speech on

Thursday that average debt ratios in the steel sector had

reached almost 70 percent by the end of July. He urged mills not

to rest their hopes on any relaxation of credit restrictions and

to refrain from raising production.

Rebar and iron ore prices at 0700 GMT

Contract Last Change Pct Change

SHFE REBAR JAN5 2834 -15.00 -0.53

DALIAN IRON ORE DCE DCIO JAN5 585 -17.00 -2.82

SGX IRON ORE FUTURES OCT 82.58 -1.38 -1.64

THE STEEL INDEX 62 PCT INDEX 84.3 -1.40 -1.63

METAL BULLETIN INDEX 85.24 -0.85 -0.99

Dalian iron ore and Shanghai rebar in yuan/tonne

Index in dollars/tonne, show close for the previous trading day

(1 US dollar = 6.1413 Chinese yuan)

(Editing by Joseph Radford and Subhranshu Sahu)