China's slowing demand for steel is driving Chinese exports of the metal to the highest level in more than three years, flooding the Asian market with supplies at a time when producers such as South Korea's POSCO are grappling with thinning profits.

Europe used to soak up most of China's steel exports, but the region's protracted debt woes have forced producers like Baoshan Iron & Steel to turn their shipments to destinations closer to home. The wave of cheap Chinese exports has fuelled price undercutting among Asia's top mills, which are expected to report profit slumps for the three months to June.

POSCO, backed by billionaire investor Warren Buffett, is expected to see its operating profit fall by a third from a year ago, analysts say.

"Before, China was exporting 2 million tonnes per month and now it is suddenly 5 million tonnes. Given that domestic demand in their respective countries is already not particularly strong, they (local steel producers) are clearly afraid," said Helen Lau, a commodities analyst at UOB-Kay Hian in Hong Kong.

"China will continue to export at a high rate for the rest of the year. I understand they (the Chinese steel mills) are making very little money from exporting, but it is still better than closing down their plants and laying off their staff."

China boosted first-half exports of the metal used in cars and construction to 27.26 million tonnes, the highest for a six-month period since 2008, as domestic consumption ebbed and inventories ballooned.

Traders say stockpiles of steel products in major Chinese cities have surpassed 15 million tonnes -- enough to build around 350 of Beijing's National Stadium, also known as the Bird's Nest Stadium because of its striking design.

Newly-started property construction in China slumped 16.3% in June from a year earlier, extending the 4.6% drop in May and cutting demand for steel.

The supply glut will likely overshadow any hopes of Beijing's policy action to stimulate an economy that is growing at the slowest pace in more than three years, signalling that the ailing sector has yet to find a bottom, analysts say.

Some large Chinese steel companies have warned of losses for the first half due to tepid demand and declining prices. Angang Steel Co Ltd estimated a net loss of around 2 billion yuan.

Steel demand in China has started to wane in the second quarter, with prices down 6 percent in June compared with early April.

"The market environment is tough and unclear for steelmakers," said Shinya Yamada, an analyst at Credit Suisse.

"The steep fall in prices has stopped in China, thanks to the government's stimulus measures, but they are not powerful enough to support the sagging market."

China's biggest listed steelmaker, Baoshan Iron & Steel, may still surprise analysts with better-than-expected results, after it sold its loss-making special steel and stainless steel assets to its parent in the second quarter. The company previously said the deals may boost its first-half profit by as much as twofold compared with a year earlier.

Baoshan will cut August prices of its main products by 4.6% to 5.6%, after its first reduction in 2012 this month, suggesting the company still lacks confidence in the market near term.

"With slowdown concerns in China heightening and raw material cost pressures easing, we expect steel prices to correct further in FY2012-13. Operating margins will remain under pressure," brokerage Motilal Oswal said in an earnings preview note to clients earlier this month.

India's Tata Steel, the world's No.7 steelmaker, is forecast to report a nearly 90% profit drop in the quarter ended June 30 on weak prices and slack sales at its European unit Corus, which accounts for most of its global capacity of 27 million tonnes.

Steel Authority of India Ltd, which is the largest steel producer in the country but trails Tata Steel by global capacity, is expected to report better sales volumes and improved margins because of lower prices of coking coal compared with a year earlier.