UPDATE 1-China steel output hits record in May despite tumbling profit margins

* China May steel output at 89.09 mln T

* Profit margins dropped due to high iron ore prices

* Steel output to stay at high level in near term -analyst (Adds detail, comment)

BEIJING, June 14 (Reuters) - China’s crude steel output hit a record high in May, official data showed on Friday, even as a jump in prices of raw materials, particularly iron ore, cut into mills’ profit margins.

The world’s top steel maker produced 89.09 million tonnes of crude steel last month, up from 85.03 million tonnes in April and 81.13 million tonnes in May a year ago, data from the National Bureau of Statistics (NBS) showed.

Average daily output of the industrial metal reached 2.87 million tonnes, according to Reuters calculations based on the official data, up from a record 2.83 million tonnes in April.

China’s steel output has been running at high levels for the past year as mills took advantage of strong domestic demand.

In January to May, China churned out a total of 404.88 million tonnes of steel, up 10.2% from the same period last year, the NBS data showed.

“Steel output will remain at a high level in the coming months, with more lenient production restrictions at major steelmaking cities in summer and expectations of robust demand from construction sites,” Zhuo Guiqiu, an analyst from Jinrui Futures, said before data was released.

The city of Tangshan, China’s top steelmaking hub, extended anti-smog curbs on heavy industry to the end of June, but mills that are scheduled to move out of the city will be exempt from the restrictions.

Utilisation rates at Chinese steel mills across the country stood at a relatively high 71.13% as of June 14, according to data compiled by Mysteel consultancy.

However, a jump in iron ore prices due to supply disruptions has sharply reduced profit margins for steel mills, clouding the outlook for further expansion in steel production.

Margins have tumbled more than 50 percent over the past two months to around 350 yuan ($50.56) a tonne for rebar steel, according to data tracked by Jinrui Futures

“Despite plunging margins, mills are not planning to reduce production at this moment as there is still some profitability,” said Zhuo.

“But we will still have to watch if operations at steel mills will be disrupted by short-term safety or environmental inspections conducted by local governments in the summer.” ($1 = 6.9225 Chinese yuan renminbi)

Reporting by Muyu Xu and Shivani Singh; Editing by Joseph Radford