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China’s steel output jumped to a record in May as mills increased production to chase fat profit margins.

Fat profit margins, which has a strong outlook for demand, is 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 Steel

China produced 81.13 million tons 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 tons.

Daily average output climbed 2.4 percent to 2.62 million tonnes in May from April, according to Reuters' calculations based on the official 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, a senior analyst.

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 ton of steel at present, not far from more than 1,000 yuan late last year.

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Strong Outlook

The utilization rate at steel firms across the country was above 71 percent from late May, a level that was last seen before winter production curbs which kicked in last October and held out till March.

Recent environmental inspections in some 10 regions have forced some mills to cut production. However, analysts do not expect the curbs to last long unless new environmental policies add to pressure on supplies.

China's output has been increasing despite its closure of 255 million tons 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 tons of capacity and are building an additional 8.6 million tons over the next few years.

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