CORRECTED - CORRECTED-UPDATE 1-China May steel output hits record 56 mln T

(Corrects daily output decline to 1.9 percent in second graph)

* Steel production at record despite demand, price fears

* Iron ore production also reaches new high

BEIJING, June 11 (Reuters) - China's crude steel output reached a monthly record of 56.14 million tonnes in May, rising 1.3 percent from April and 20.7 percent year on year despite industry concerns about narrowing margins and uncertain demand.

Daily output declined by 1.9 percent from April to 1.81 million tonnes, and analysts expect it to decline dramatically in the months ahead as mills try to cope with falling prices and rising iron ore costs.

In April, prices were at their highest point since last August as producers and traders anticipated healthy returns going into the peak construction season. But they fell more than 8 percent over May with traders clinging to the sidelines in fear that tightening policies would lead to a collapse in real estate demand in the second half of the year.

A number of steel firms are already planning output cuts over the month and rolling mills in northern China are estimated to be running at less than 50 percent of capacity, according to the China Securities Journal.

Baosteel (600019.SS), China's second-biggest steel producer, has already cut its benchmark product prices for July, and the company's chairman, Xu Lejiang, said on Tuesday that tougher times lay ahead, with iron ore costs peaking and demand likely to be sluggish in the third quarter. [ID:nTST000201]

Iron ore output rose 3.4 percent month on month to reach a new record of 91.05 million tonnes in May, with importers discouraged by high prices and new measures aimed at restricting low grade deliveries.

Ore production was 38.5 percent higher than last year, when prices were too low to support the expensive production costs at China's mines and local mills switched to imports.

China, unhappy about its dependence on foreign supplies, has sought to encourage domestic production, but local ores with lower levels of iron content are less economical.

The government is studying proposals to cut taxes for domestic iron ore producers in order to reduce their costs, Zeng Shaojin, vice-president of the China Mining Association, said on Tuesday. (Reporting by David Stanway, Editing by Jacqueline Wong and Ed Lane)