Oct 16 (LTIT) –The outlook for China's steel market softened in October amid expectations of a weak final quarter due to slower construction activity and robust steel production, the latest S&P Global Platts China Steel Sentiment Index, or CSSI, has found.

The October CSSI showed a headline reading of 16.04 points out of 100 in October, down from 26.18 in September. October's reading was the lowest since June this year.

The headline CSSI, which monitors the outlook for steel orders over the coming month, has averaged just 23.45 over January-October, compared with 42.54 in the same period last year.

In the October CSSI, expectations for steel prices fell by 13.93 points from the previous month to 39.1.

A reading above 50 indicates expectations of an increase or an expansion and a reading below 50 indicates a decrease or a contraction. The CSSI is based on a survey of around 50 China-based traders and steel mills.

The outlook for crude steel production was flat last month, down just 0.56 to 44.44, though opinion differed about the potential impact of winter production cuts on output in the final quarter. China's crude steel production is up by around 10% so far this year, according to government data.

More worrisome was the expectation that steel inventories would climb over the coming month, which could put downward pressure on steel prices. The CSSI sub-index for inventories rose by 15.09 points from September to 32.68 in October.

One mill source in Hebei province said stricter controls on production in northeastern China in October would be offset by stronger output from Shanxi province and mills in China's south, which are not subject to the same controls.

"Therefore there won't be a big drop in overall supply, and in any case demand will also be weaker as the weather gets colder," the mill official said.

One mill manager said 90% of mills in Tangshan City in Hebei province would need to cut production and he believed the policy would be strict during the winter period. He was also worried about the level of lower priced steel imports coming into China. Russia and India have lifted their exports of flat steel and billet in recent weeks.

A source at another mill in Hebei province said the company's environmental protection facilities were not as good as larger mills and therefore the mill would be ordered to cut production substantially over winter.

In general, mills that participated in the Platts CSSI were pessimistic about the market in Q4. They believed profits would be slimmer due to softer demand from the construction sector during the colder months.

Average profit margins for domestic hot-rolled coil and rebar were $24.30/mt and $47.90/mt, respectively, in September, Platts analysis showed.