A steep decline in steel prices in August and early September forced Chinese steel mills to cut production to minimise losses, as the slowing economy in the world's top steel-producing region hit demand.

Average daily steel output dropped to 1.858 million tonnes for the whole of September, the CISA data showed, down 1.9 percent from 1.894 million tonnes in August.

The association's estimates on the country's total output are based on its membership of around 70 large state-owned steel mills that account for about 80 percent of the country's total steel output.

Some industry sources said actual steel production in September was higher than the CISA estimates, however, as recent gains in steel prices would have prompted mills, particularly smaller private ones, to lift production.

"Some small and medium-sized privately-owned steel mills, which are quite flexible in arranging production, have been encouraged to increase output in the face of rising steel prices," said Hu Yanping, an analyst with industry consultancy Custeel.com.

"A survey we carried out showed that the utilization rate of 148 blast furnaces in Tangshan (Hebei province), rose in late September. So the real output could be higher."

Shanghai rebar futures have surged to a two-month high, recovering almost 15 percent from a record low hit in early September, as demand picks up seasonally when construction activity are accelerates.

"The continuous rise in steel prices has increased profit margins for steel mills.

I expect output to accelerate in October," said Qiu Yuecheng, an analyst with Xiben New Line Co Ltd, a spot steel products trading platform in Shanghai.

Qiu said that most privately-owned steel mills are able to generate profits of between 100 yuan ($16) and 200 yuan per tonne.

China's biggest listed steelmaker, Baoshan Iron & Steel , surprisingly kept its November prices unchanged, suggesting it is cautious on the near-term market outlook.