* Industry profits, margins up in Q1 but slipped in March
* Government stepping in to tackle overcapacity
* CISA urges more support to domestic iron ore trading platform
By David Stanway
BEIJING, April 27 (Reuters) - China's steel industry body warned its members on Saturday to rein in expectations for the remainder of the year, saying that an anticipated increase in demand would not be enough to justify big rises in production in coming months.
Officials with the China Iron and Steel Association (CISA) told reporters at a briefing that the government was looking for new ways to restructure the sector, which was still facing massive problems.
China's steel industry, the world's biggest, is struggling with poor margins and weak demand even as it heads into the April-June peak consumption season. Sluggish sales in China sent benchmark iron ore prices to their lowest point in more than five weeks on Friday.
CISA chairman Zhu Jimin said producers should not be misled by "bright spots", including improvements in downstream sectors like automobiles, railway construction and shipbuilding.
"Downstream demand will gradually improve, but at the same time it is difficult to see any relatively big rises in steel consumption, and the expectations of steel firms should not be too high, and they should not blindly expand output," he said.
The association, which represents around 80 large- and medium-sized steel mills, said in a review of the industry over the first quarter of 2013 that, while overall profits had improved, the market was increasingly precarious.
Large steel firms earned 2.486 billion yuan ($403.24 million) in the first three months after suffering losses in the same period last year. In March, profits fell to 267 million yuan, with margins down to a razor-thin 0.28 percent.
LEVEL PLAYING FIELD
According to industry estimates, total annual crude steel production capacity in China is approaching 1 billion tonnes, with mills still expanding even though apparent demand is predicted to reach just 698 million tonnes this year. CISA officials called on firms to improve "self-discipline".
"We can put it like this - current steel capacity can already completely satisfy peak domestic steel consumption and we should stop all blindly expanding projects," said Li Xinchuang, CISA's deputy secretary general.
Li said the government was examining ways of tackling the industry's overcapacity problems, and tougher environmental measures and technological requirements could be used to try to ensure smaller firms face the same social responsibilities as their big state-owned counterparts.
"There is a huge gap between companies that protect the environment properly and those that don't, with costs per tonne of steel around 157 yuan higher - this is unfair competition."
CISA also called on steel enterprises to do what they could to strengthen a domestic iron ore trading platform run by the China Beijing Mining Exchange (CBMX).
Reuters reported this month that importers were under instruction to trade at least 500,000 tonnes of iron ore on the exchange in order to get licensed.
Wang Yingsheng, the head of CISA's market research division, said it was the responsibility of the China Chamber of Commerce of Metals Minerals and Chemicals Importers and Exporters (CCCMMC) rather than CISA to maintain "discipline" among Chinese iron ore traders, but said CISA supported efforts to boost the platform and thereby improve price transparency.
Beijing has long complained that pricing power lies with big iron ore suppliers like Brazil's Vale and Australia's Rio Tinto and BHP Billiton , even though two thirds of sea-borne supplies are bought by China.
In a change of emphasis, Wang denied China wanted to improve its "say" over prices, saying it only wanted a system that better reflected the market.
"In the long term prices are determined by supply and demand but, in the short term, there are manipulations from particular sides. It isn't that we buy a lot and should have more say over prices - if we stop buying, the prices will come down."