Steel prices on the Chinese domestic market got a lift this week in anticipation of rising demand in September following the lull in July and August.

Construction steel prices inched up to 4,030-4,050 yuan per tonne in Shanghai on Thursday, up 4.4 pct from last week, industry consultancy Mysteel said.

Rebar, widely used in the construction sector, passed the threshold of 4,000 yuan per tonne after remaining at low levels over the past three months.

The recent wave of price hikes since the middle of July was widely suspected to have been the result of speculative activity, rather than increasing demand, but market sentiment has improved cautiously this week with traders and end users expected to return to the market and replenish their stocks.

"The market sentiment is growing more optimistic this week, but I still think the big increase is based on speculation," said a trader in Shanghai.

Shagang Group, China's biggest non-state-owned steel mill, has raised wire rod and rebar prices by 70-120 yuan per tonne for early September delivery, which gave another fillip to the market.

Benchmark January rebar futures, the most active contract by trading volume on the Shanghai Futures Exchange, ended Thursday at 4,386 yuan per tonne, 3 percent up since last week.

However, leading steel mills remain concerned about slowing economic growth in the second half of this year after China vowed to maintain lending curbs in order to take the heat out of the property market.

Baosteel, the biggest listed Chinese steel mill, said the market could get tougher in the remaining months of the year, with prices likely to fall even lower in the fourth quarter, but it said it was still expecting its profits to remain intact.

Chinese steel prices are still under pressure as a result of slowing domestic demand as well as the collapse of foreign sales following the cancellation of export tax rebates, Baosteel general manager Ma Guoqiang said.

China's purchasing manager's index bounced back to 51.7 after slowing for several months, indicating a moderate rebound in the manufacturing sector, but some analysts are still expecting China's economy to slow down in the second half.

ELECTRICITY CURBS

Several steel mills in north China have been ordered by local authorities to restrict electricity consumption as part of the country's efforts to close inefficient and obsolete capacity.

Around 20 percent of electricity supply has been cut at all steel mills in Wuan county in Hebei, China's largest steel-producing province, while the local government in neighbouring Shanxi province has also called for the "rectification" of backward steel mills to be speeded up over the next two months, according to Mysteel.

Elsewhere, steel mills in several eastern Chinese provinces -- including Jiangsu and Zhejiang -- have also seen output reduced as a result of strict measures to curtail electricity consumption.

But a few mills have also been negotiating with local government authorities.

"We should not be over optimistic about this policy and I don't expect the government to achieve the required effect of making the domestic steel sector more efficient this year," a senior Mysteel researcher said.

China's steel mills have been producing more than 1.7 million tonnes of crude steel per day since August, suggesting the output would reach at least 620 million tonnes this year, much higher than last year's record of 568 million tonnes.