Chinese steel mills are facing a precarious situation in the third quarter due to falling product prices and rising raw material costs, forcing many of them to scale back output or opt for maintenance shutdowns, leading industry experts said on Monday.

The nation's largest publicly traded steelmaker Baoshan Iron and Steel Co (Baosteel) cut prices for the first time in the last eight months recently as the demand outlook weakened in the downstream sectors due to the changing government policies.

"Some steel producers are already tottering on the brink of losses. They will have to make output cutbacks or resort to maintenance shutdowns, if the prices continue to fall," said Zhang Lin, an analyst with the Beijing-based Lange Steel Information Research Center.

Baosteel cut prices of hot-rolled products for July by 300 yuan ($44) per ton and cold rolled prices by 500 yuan per ton. Prices of auto cold rolled steel have been cut by 1,000 yuan per ton, the company said.

Hot-rolled steel coil will be priced at 4,942 yuan a ton, down 9 percent from the previous month, while the price drop for cold rolled steel coil could be more than 10 percent.

Chinese steel mills began to cut product prices in June after the Spring Festival, signaling a market adjustment due to weak downstream demand.

"We've seen orders dwindling in downstream sectors like auto, shipping, home appliances and property," said Zhang.

Weak auto sales in May and lower automobile output in the past two months has also led to a plunge in orders.

In April, average steel prices in China reached their highest level since last August. But steel prices began to fall after the government released macroeconomic polices to control property prices. Most big steel mills had earlier raised products prices to transfer higher iron ore costs as a result of the shift to the quarterly pricing system.

Rising iron ore prices had forced steelmakers to offset the high production costs to consumers to make up for the decline in margins.

The new pricing system, which came into effect on April 1, saw the big three global miners getting over $130 a ton for ore supplies in the second quarter, more than double last year's fixed price.

Iron ore prices in the third quarter will increase by 35 percent, said recent reports.