China’s steel industry, the world’s largest, may end up losing money next year as excess supplies weigh on prices, a senior official at the country’s second-largest mill warned.

Prices in the physical Chinese steel market have fallen more than 20% since early August as a steady rebound in demand lags the more rapid rise in supply. Steelmakers eager to take advantage of China's economic recovery have boosted domestic production to record monthly levels.

“Stockpiles of construction steel products at steel mills have returned to a level last seen at the end of last year - a substantial amount,” said Han Weidong, deputy chief of Hebei Iron and Steel Group’s market section.

“There is a risk that China’s steel sector will return to an overall loss in 2010,” Han told an industry conference.

Han said China’s domestic steel demand was unlikely to reach 600Mt next year, while an expected reduction in bank lending in 2010 could hurt both end-user demand for steel and expansion at steel mills, restraining growth in iron ore consumption.

A senior executive of the China Iron and Steel Association said that China’s apparent steel consumption was expected to rise about 26% or about 120Mt this year, although this was partly due to rising inventories.