China's steel industry will likely produce a record amount of crude steel this year, even as a sharply slower economy drags iron-ore and steel-product prices to multi-year lows. Full-year output is likely to reach 722 million metric tons, a 5.2% rise from 2011 amid "mild" output cuts, J.P. Morgan said in a note Monday.

The estimate illustrates China's quandary as steelmaking overcapacity limits the ability of the industry to respond effectively to macroeconomic changes.

"Despite recent destocking by steel traders, overall [steel] inventories remain above the historical average and production cuts have been modest," J.P. Morgan said.

Crude steel production inched just 1% lower in July on month despite the slowdown. Output cuts scheduled for August and September will likely remove 1.3 million tons due to scheduled maintenance, Standard Chartered said, but this may not be significant enough to lift weak prices.

Spot iron-ore imports for China delivery fell to $99.60/ton last week for 62% iron content, the lowest level since December 2009 and down 33% from this year's high in April. Prices have recovered slightly since to $100.10 Monday, Metal Bulletin data showed.

Standard Chartered on Friday cut its price forecast for iron ore in the fourth quarter to $115/ton from $160/ton. The bank also lowered its 2013 target to $135/ton from $182/ton, though it noted that better macroeconomic data after August is likely to boost steel consumption.

Still, iron-ore stockpiles at China's ports have stabilized around 96.8 million tons in mid-to-late August, falling to around 30 days' worth of cover compared with a peak of 40 days in the November-December period last year. This is a "normal" level, J.P. Morgan said, adding that it "does not expect significant destocking to happen."

Helping to offset the high inventory levels at port, steel mills were holding "very low levels" of iron-ore stocks, about a month's worth versus two months in 2011, Standard Chartered said.

This would suggest that high inventory numbers are partly the result of a shift of the raw material out of mills into ports rather than an outright increase at both sets of warehouses.

China's steel stocks also fell to around 16 days' worth in July from a peak of 19 days in February, J.P. Morgan said. Steel futures on the Shanghai Futures Exchange Monday reached a record low of 3,492 yuan a ton.