* Steel mills in China cut use rates on demand concerns
* Traders reluctant to stock up as inventories at 10-mth high
By Min Zhang and Tom Daly
BEIJING, Feb 11 (Reuters) - Steel traders in China are holding off returning to the market for their usual post-Lunar New Year purchases, their appetites dampened by sluggish demand from a construction sector hit by the outbreak of a flu-like virus.
The coronavirus, which has killed more than 1,000, was first discovered in December in Hubei province and has forced China to limit public activities and cut transport links as it spread across the country.
The epidemic is expected to hurt the world's second-largest economy, with a government economist and other analysts saying that China's first-quarter economic growth may dip below 5%.
China's containment measures have also weighed on a seasonal pick-up in demand for construction steel, forcing traders - who typically replenish stock after the holiday period - to hold back purchases because of the uncertain economic outlook.
A trader in the eastern city of Hangzhou, capital of Zhejiang province, said demand usually recovers after the Lantern Festival, which fell this year on Feb. 8.
"But this year is special," he said. "There's no construction activity ... Who would buy at this time?"
This trader and three others, all requesting anonymity as they are not authorised to speak to media, said they haven't bought any steel products recently and expect their post-holiday restocking to be postponed until the virus is under control.
Steel product inventories held by traders in China - at 16.33 million tonnes on Feb. 6 - are already at their highest since March 2019, data compiled by Mysteel consultancy showed, indicating they already have sufficient stocks.
Logistical constraints, with many provinces restricting road transport to control spread of the virus, have added to the pressure on the sector, making it more difficult to bring in raw materials and ship out steel products.
"There's downward pressure on steel prices, which means mills' profits will be compressed," said Richard Lu, an analyst with CRU metals consultancy in Beijing, adding that some mills will cut output out of profitability and supply concerns.
Benchmark construction steel rebar on the Shanghai Futures Exchange, for May delivery, plunged nearly 10% from Jan. 20 to Feb. 3, as the coronavirus broke out of Hubei province and spread across China and around the world.
While the rebar futures have rebounded 2.7% on Tuesday, demand in spot markets for steel products and iron ore remained weak amid industry shutdowns in China, said Helen Lau, a metals and mining analyst at Argonaut Securities in Hong Kong.
Hunan Valin Steel Co Ltd, listed arm of Hunan's biggest steelmaker Valin Group, told an interactive platform run by the Shenzhen Stock Exchange that it would "consider cutting production when necessary".
Weekly utilisation rates at blast furnaces in 247 mills were at 77.76% as of Feb. 7, down from 80.01% before the holidays and the lowest since early November, according to Mysteel.
The China Iron and Steel Association said last week the sector is "not promising" this quarter, but it expects a recovery in the second quarter with the implementation of government stimulus measures. (Reporting by Min Zhang and Tom Daly; Editing by Shivani Singh and Tom Hogue)