Chinese steel mills have begun cutting production as record stockpiles continue to build, signalling further weakness for iron ore prices and a slowing growth in the world’s second biggest economy.

A sluggish construction market and a lack of additional stimulus measures from Beijing has China on track to record its first annual decline in steel production in 31 years, analysts said.

The managing partner of research firm J Capital in Beijing, Tim Murray, said that while official data indicated steel production was flat, he estimated it fell by as much as 10 per cent over the first 15 days of August.

“This is the first indication of ­significant cuts,” he said. “There are some seasonal factors at play, but the volume coming off is unusual.”

The weak Chinese steel market will put pressure on miners BHP Billiton and Fortescue Metals Group (which report this week) and Rio Tinto. All are expecting demand for iron ore to rally in the second half of this year.

Softening Chinese demand will also lower federal government revenue, making it harder for the Gillard government to achieve a budget ­surplus. The iron ore price has fallen from $US140 a tonne in early July to trade around $US113 a tonne on Friday. “I think $100 might be the new price equilibrium,” Mr Murray said.

Rio Tinto chief executive Tom Albanese said earlier this month the miner was caught out by the faster than expected slowdown over the first half in China, but was expecting activity to pick up. “We still expect . . . a pick-up of growth in the fourth quarter as government stimulus starts to kick in,” Mr Albanese said.

But many analysts are doubtful existing stimulus measures will be enough to underpin demand. “The present malaise [in the iron ore market] is likely to continue for the rest of the year,” CLSA commodities analyst Ian Roper said.

China is the world’s largest steel producer and accounts for half of global output. Declining production comes as stockpiles of steel across China hit new records.

Figures published by the China Iron and Steel Association (CISA) show inventories were 26 per cent higher than last year at August 10.

“The property and ship-building sectors are sluggish,” said Qiu Yuecheng, a senior analyst at Xiben New Line, a steel trader. “Purchases of steel in Shanghai fell 15 per cent in July from the previous month.”

Mr Qiu said China had overbuilt steels mills and now had too much capacity. He estimated average daily steel production will be about 1.8 million tonnes by year’s end, compared with 2 million tonnes in May.

This should see annual production fall below last year’s 683 million tonnes, China’s first annual decline in more than three decades.

These widely expected production cuts clash with CISA figures that showed production rose 1.1 per cent over the first 10 days of August to an average daily output of 1.97 million tonnes. But CISA data is based on reports from big steel makers, and may overlook trends among smaller producers. In addition, “there are a lot of incentives to not report what is happening”, Mr Murray said.

A report this month by leading US fixed interest fund manager Pimco said Chinese steel production had reached a near-term peak.