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China is expected to produce far more steel than it needs in 2006, resulting in a surplus of 116.5 million tonnes that will exert downward pressure on the country's steel prices, a government think-tank said on Wednesday.

The State Council Development Research Centre, the cabinet's think-tank, said output of iron ore -- a key raw material for steel -- would rise 15.5 percent to 448.7 million tonnes next year, thus easing supply concerns.

The think-tank said steel supply, including production and imports, in China would rise 48 percent to 453.4 million tonnes in 2006, while it saw demand at only 336.9 million tonnes.

China is the world's largest maker and consumer of steel.

"The overcapacity problem in China's steel industry cannot be solved next year, and that will further depress steel prices," it said in a report published in the official China Securities Journal.

The forecast steel surplus would be more than twice that of the think-tank's 2005 expectations of 43 million tonnes, as a slowing property sector slashes demand growth for the metal.

That has caused the country's steel prices to dive an average of more than 30 percent since peaking at a decade's high around the end of March, hitting steel mills such as Baoshan Iron and Steel Co. Ltd.

Baosteel, China's biggest and the world's number-six steel maker by volume, said earlier in November it would cut product prices by an average of more than 10 percent in the first quarter of 2006 versus the fourth quarter of 2005.

China became a net steel exporter in the first 10 months of this year, selling 23.29 million tonnes of steel and steel products abroad, compared with imports of 23.06 million tonnes, official figures showed.

The country is expected to become a net steel exporter on an annual basis for the first time in 2005, fanning fears of a flood of cheap steel on global markets.

"As for raw materials, demand growth for iron ore will slow and imports will not increase sharply," the think-tank said. "There should be no problems regarding iron ore supply."

Asian producers, including Nippon Steel Corp. and POSCO , are calling for iron ore price cuts from suppliers Rio Tinto Ltd/Plc. , Companhia Vale do Rio Doce and BHP Billiton Ltd/Plc. , which are seeking a small rise on top of last year's 71.5 percent surge.