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BEIJING, March 31 (Reuters) - Activity in China's steel industry expanded at a slower pace in March even as mills continued to ramp up output, sparking worries of oversupply in the world's top producer of the metal, an industry survey showed on Friday.
A renaissance in China's steel industry has been a major driver of the world's second-largest economy in recent quarters, helping generate the strongest profit growth in years.
The Purchasing Managers' Index (PMI) for the steel sector fell to 50.6 in March, down from February's 51.4 but still above the 50-point mark that separates growth from contraction on a monthly basis, according to data from China Federation of Logistics & Purchasing (CFLP).
Since last year, cash-starved Chinese mills have boosted production to take advantage of rising metal prices and higher profit margins, but a reading on new orders slipped to 50.6 in March from 55.3 in the previous month, suggesting a sharp cooling in demand.
Steel prices were on track for a 4 percent fall in March, the first monthly drop since December, on worries that supply is outstripping demand.
Inventories of finished goods expanded for the first time in March after five months of decline, rising to 53 from 47.7 in February, its highest level since July 2015.
But despite rising inventories, steel output quickened to a 10-month high in the month, up to 52 from 50.4 in February.
"If inventories can't be digested quickly, steel factories will once again face relatively large destocking pressures," CFLP said in a release, adding that steel inventory by March 31 was 29.6 percent higher than the same time last year.
A months-long construction boom fuelled by a strong housing market and higher government infrastructure spending have spurred China's demand for steel and other building materials.
But fresh government curbs to cool the heated property market in recent weeks are expected to dampen housing demand and drag on investment and industrial activity eventually.
More than a dozen Chinese cities have tightened restrictions on home purchases so far this month to deter speculation. (Reporting by Yawen Chen and Josephine Mason; Editing by Kim Coghill)