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Chinese iron ore, steel prices slip on oversupply worries

* Market unimpressed by latest mini-stimulus in northeast

* Iron ore, steel inch down; traders hope for September

revival

* Illegal steel production still adding to oversupply

By David Stanway

BEIJING, Aug 20 (Reuters) - Prices of iron ore and steel

continued to fall in China on Wednesday, with traders still

worried by oversupply and unimpressed by the latest government

efforts to stimulate construction demand in northeastern

regions.

"I'm just observing the market to see where I can make a

profit. If there are price differences between the Dalian

Commodity Exchange and the ports, for example, we can sometimes

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make money, but right now there isn't much of an opportunity,"

said a trader based in Beijing.

"Right now, the price for iron ore is going down and down,

and I personally believe we need to wait until September or

October before it goes up again," he said.

On Tuesday, China issued detailed new policy measures aimed

at speeding up infrastructure investment in its struggling

northeastern rust belt.

While new road and rail projects in the region could

stimulate steel demand, the policy wasn't enough to breathe life

into the stagnant iron ore market.

Benchmark 62 percent grade iron ore for immediate delivery

into China slipped 0.3 percent on Tuesday to end

at $93 per tonne, its lowest level in two months and 33 percent

lower than at the same time last year.

"A price recovery in iron ore is being held back further by

mills that are selling long-term, fixed-price cargoes into the

spot market, adding to excess supply," Australia and New Zealand

Bank said in a note on Wednesday.

Domestic supplies also remain resilient, with utilisation

rates at major Chinese iron ore mines rising in August,

according to research published this week by Chinese brokerage

GF Securities.

Rebar prices on the Shanghai Futures Exchange ended

the morning session down 0.33 percent at 3,003 yuan ($489) per

tonne. The most active iron ore contract for September delivery

on the Dalian Commodity Exchange finished at 654 yuan

a tonne, up 0.31 percent.

Melinda Moore, an analyst with Standard Bank, said the

market was "still absorbing over-exuberant steel mill output in

the first 10 days of August".

There were signs that China was getting to grips with steel

oversupply in July, when plant overhauls and even closures

helped drag average daily steel output down to its lowest level

of the year, according to official data.

However, the daily rate remained 3 percent higher than the

average in the whole of last year, and China Iron and Steel

Association data on Monday showed it had rebounded in August.

Analysts said the scale of the production increase in the

first 10 days of the month had taken the market by surprise and

suggested that China's efforts to shut down old capacity were

not having as big an effect as anticipated.

China's industry ministry has set a September deadline for

the closure of nearly 47 million tonnes of steel and iron

smelting capacity, but the shutdowns can quickly be offset by

larger mills seeking to expand market share. Despite a state

crackdown, illegal production also remains a factor.

"Illegal production capacity remains too strong, and as soon

as capacity is shut down, illegal capacity comes and replaces

it," according to a research note from online steel trading

platform GTXH.com.

Rebar and iron ore prices at 0331 GMT

Contract Last Change Pct Change

SHFE REBAR JAN5 3003 -10.00 -0.33

DALIAN IRON ORE DCE DCIO JAN5 654 +2.00 +0.31

THE STEEL INDEX 62 PCT INDEX 93 -0.30 -0.32

METAL BULLETIN INDEX 93.03 -0.32 -0.34

Dalian iron ore and Shanghai rebar in yuan/tonne

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

(1 US dollar = 6.1464 Chinese yuan)

(Editing by Alan Raybould)