China may produce a higher-than-expected 700 million tons of crude steel this year in anticipation of higher demand, the nation's top planning agency said yesterday.

The National Development and Reform Commission made the annual projection based on the average daily output of 1.93 million tons in the first quarter of this year, citing figures from the China Iron and Steel Association.

The government and an industry group earlier estimated this year's output at 660 million tons. China produced 627 million tons in 2010.

"A further increase in steel output is brewing competition in the domestic market," the NDRC said in a statement, noting that the industry's profit margin further narrowed.

Squeezed by high iron ore and coking coal prices, key steel companies only make a 3 percent margin on profits, the NDRC said, adding some steel mills have stopped ore imports in the cash market to ease cost pressure.

While the government's plan to build more affordable homes and rapid urbanization will boost steel demand and Japan's reconstruction after the earthquake and tsunami may raise hopes of higher exports, the NDRC cautioned against a "strong rebound" in the steel market because of China's prudent monetary policy to curb inflation and its tightening of the property market.

Demand for long products, used in construction, is rising amid seasonal demand but that for steel plates, used in the auto and home appliance industries, remains weak, said Qiu Yun, an analyst at Mysteel Research Institute.