A worker works at a steel factory in Dalian, Northeast China's Liaoning province. [Photo/VCG]

BEIJING - China's steel prices have begun to rise, but an industry group tried to calm the market Tuesday, saying the increase will be limited as new production capacity is set to ease supply.

The steel price index climbed to this year's peak of 106.49 at the end of July, lifted by higher iron ore costs, improved demand as well as lower supply due to government policies to cut steel overcapacity and enhance environmental protection, China Iron and Steel Association (CISA) said on its website.

The country's crude steel output rose 5.1 percent year on year to 492 million tons in the first seven months this year, while apparent consumption of crude steel increased 10.9 percent to 450 million tons, according to CISA data.

Although production restrictions amid tighter enforcement of environmental rules during the winter heating season will cap supply in the coming months, expanding competitive capacity will help contain large price rises, the CISA said.

China has been striving to close small mills that churn out low-quality steel made from scrap metal, this year, leading to decreased supply.

The crackdown on the small low-end furnaces, accounting for 4 percent of total steel output, came as Beijing aims to cut excess capacity, tackle pollution and improve safety measures at these mills.