* Apparent consumption growth lower than output growth in H1
* Debt, financing still problematic, but under control
* Overcapacity policies still not being fully implemented (Adds quotes, background)
By David Stanway
BEIJING, Aug 1 (Reuters) - China's apparent steel demand in the first six months of 2014 rose just 0.4 percent from a year earlier, the country's steel association said on Friday, significantly lagging a growth in output as chronic overcapacity continued to hurt the sector.
This adds more pressure on the bloated steel industry in China, the world's top producer of the metal, which is battling weak margins at a time when a price slump and tight credit have already put hundreds of mills under severe financing stress.
China's apparent crude steel consumption reached 376 million tonnes in the first half versus a 3 percent rise in actual production to 412 million, as steel mills pumped out record volumes despite crippling credit restrictions and a pollution crackdown, the China Iron and Steel Association (CISA) said.
"The policies are having an effect but they are not yet fully in place," CISA Secretary General Zhang Changfu said at a press briefing on Friday. "Eliminating outdated capacity is a very difficult process."
China has an estimated capacity of more than 1 billion tonnes. Overproduction has led to a plunge in prices, and the state has tried to encourage smaller producers to exit the market by raising environmental costs and restricting credit.
Shanghai rebar steel futures have dropped over 17 percent in 2014, on track for a fifth straight year of decline.
CISA's secretary general was, however, optimistic that while overall growth would slow, there was room for a further rise in China's steel demand.
His deputy, Qu Xiuli, said the sector still faced severe financial problems but that the worst was over.
"Enterprises have worked very hard on controlling their inventories, and by June their debt ratio had not increased - the situation is hard but it is now under control," she said.
CISA said 28.4 percent of large and medium-sized steel mills made losses in the first half of 2014, down 7.94 percentage points from a year ago. Profit margins averaged at 0.41 percent in the first six months of 2014, up 0.23 percentage points.
Inventories held by large steel mills stood at 14.46 million tonnes by the end of June, the first increase after three months of decline but down 6 percent from end-March, CISA data showed.
China managed to sell most of its additional steel output in the first half on overseas markets, with exports up 34 percent from a year ago to 41 million tonnes.
However, CISA said exports were unlikely to rise further due to growing trade frictions. Currently there are 12 anti-dumping investigations against Chinese steelmakers, involving around 2 million tonnes of exported products, the head of CISA market research, Wang Yingsheng, told the briefing.
FIRMS FLOUT EMISSION STANDARDS
Meanwhile, China is expected to ramp up efforts to curb overcapacity and pollution in its steel sector.
According to new government guidelines due to go into effect from August, steel firms that fail to meet emission standards could be subject to further credit restrictions as well as punitive power and water prices.
Industry consultancy GTXH.com estimated this week that as much as two thirds of China's steel firms had not properly complied with state environmental standards.
CISA's Zhang said he did not know the proportion of steel firms currently in breach of state rules, but admitted the problem was widespread.
According to CISA data, environmental costs at Chinese steel mills stand at an average of 55 yuan per tonne, but top state firms are spending 110 yuan, and Zhang said work needed to be done to create a more level playing field. (Reporting by David Stanway; Writing by Fayen Wong; Editing by Himani Sarkar)