* Some steelmakers starting plant maintenance
* But output cuts too small to support prices
* Weak steel prices pile pressure on iron ore
By Ruby Lian and Fayen Wong
SHANGHAI, June 7 (Reuters) - Some Chinese steelmakers are tentatively curbing output by starting plant maintenance, as weak steel prices squeeze margins, but the cuts look like being too little and too late to support prices at the lowest in more than nine months.
With a glut in supply persisting, an extended period of weak steel prices in the world's largest consumer and producer is likely to put more pressure on iron ore. Prices for the key steelmaking ingredient .IO62-CNI=SI have fallen a third this year and are set to dip further as more ore comes onstream.
Steel mills, which ramped up production earlier in the year on hopes for strong demand, are reluctant to make decisive cuts even as China's economic growth falters, fearful they could lose market share and that banks could pull back credit.
"Steel production is starting to slow and this will extend to July. But the maintenance programmes will not offer much support for prices," said Hu Yanping, an analyst with industry consultancy Custeel.com, adding that mills will be forced to reduce prices further in July.
Baoshan Iron & Steel, the biggest listed steelmaker by market value, known as Baosteel, slashed prices for the first time in nine months in June and is expected to cut again in July, slicing steelmakers' razor-thin margins further.
Some major mills such as Hebei Iron & Steel Group have scheduled partial maintenance for June, while large private mill Rizhao Steel has already started repair work, Custeel said.
The consultancy estimates that production cuts at steel mills it surveyed will reduce crude steel output by 1.24 million tonnes over the whole maintenance period and hot-rolled coil by 600,000 tonnes.
But that is a drop in the ocean compared to bulging stockpiles, with China Iron & Steel Association data showing steel product inventory at large mills at about 13.7 million tonnes. Inventories held by traders are hovering at about 20 million tonnes, according to consultancy Mysteel.
Custeel's Hu reckons China's steel prices can only rebound if average daily crude output drops to around 2 million tonnes, down roughly 8 percent from current record levels.
But mills are reluctant to make such drastic reductions despite currently losing 100-300 yuan ($16-49) for every tonne they sell. They say that hefty fixed costs would make it expensive to halt production lines and that cuts would erode their economies of scale, reducing their market share.
Industry sources said that producers also fear output curbs could prompt banks to cut back on loans, a crucial lifeline for a sector in which the 30 largest listed firms have racked up combined debts of nearly 760 billion yuan ($124 billion).
"Banks will pull back lending or stop rolling out loans once mills stop producing, so mills are all desperate to keep up with production and maintain cash flow," said an official with a medium-sized mill in south China, who declined to be named.
China's annual crude steel capacity has expanded to nearly 1 billion tonnes, with a surplus of nearly 300 million tonnes, even though profit margins slid to 0.04 percent last year from 3.3 percent in 2008 and 2.24 percent in 2011.
Local governments are keen to help mills survive as the sector employs a large number of people and is an important source of tax revenue.
Authorities in the northeastern city of Beipiao last week provided a subsidy of 31.8 million yuan to Linggang Beipiao Steel Pipe, a unit of Lingyuan Steel.
But local governments are struggling with heavy debts themselves, so are unlikely to offer much long-term support.
"Local governments are able to keep steel mills going but in the long term, some (producers) may have to go bankrupt," said Sheng Zhicheng, vice secretary general of the steel logistics committee under the China Federation of Logistics & Purchasing.
($1 = 6.1317 Chinese yuan)
Editing by Joseph Radford