Chinese steel prices are likely to resume their fall in the second half of 2006 as growth in the country's demand for the metal slows, said an official at Baosteel, the world's sixth-largest steel maker.

Jia Yanlin, managing director of Baoshan Iron and Steel Co Ltd's raw material purchasing centre, told industry officials on Thursday a strong rebound in steel product prices since February was unsustainable, due to the nation's overcapacity.

"The growth rate in demand in 2006 will be much lower than in the past four years. The current output is very, very large," he said at a ferro-alloy conference organised by Metal Bulletin.

"Inevitably, prices will be on a downward path in the second half of this year."

Baosteel, China's largest steel maker, had a 2005 crude steel output of 23 million tonnes.

China's steel prices dived 32 per cent between last March and the end of last year, as capacity expansions led to a glut, especially in construction steel and flat products.

Yet prices rebounded in the first two months of 2006, allowing Baosteel to set its second-quarter prices more than 10 per cent higher than the first quarter.

Jia said factors underpinning the recent pick-up included a correction following a slump in prices last year, large exports and strong seasonal demand in the second quarter.

"We have a peak in demand in the second quarter every year," the official said. "But generally speaking, there is an oversupply (this year)."

Between 2006-2010, Jia said the growth in China's steel demand would slow to an average of about 6 per cent a year, from 21 per cent between 2000 and 2005.

Referring to China's fixed asset investment, which expanded by more than 25 per cent year-on-year in the last four to five years, the Baosteel official said: "I don't think China can keep such high growth rates for fixed asset investment."

"Fixed asset investment accounts for about half of GDP.

This has never happened in other countries."

Jia predicted many Chinese steel companies would suffer from losses and face cash flow and payment difficulties in future as steel prices decline. He also expected the industry to see many mergers and acquisitions.

Chinese steel firms' profits fell 74.6 per cent in the first two months of the year, compared with the same period of 2005, Chinese media said on Thursday, citing government statistics.