The Metallurgical Industry Planning and Research Institute (MPI) in its annual report forecast production would fall 3.1 percent to 781 million tonnes next year.
That will lead to a drop in iron ore consumption in the world's No. 1 consumer of the steel raw material of 4.2 percent to 1.07 billion tonnes, said the report by the state-run research body.
Consumption of steel products is expected to decline to 648 million tonnes in 2016, also down 3 percent from 2015.
"Overcapacity remains big ... it will take time to solve inventories and overcapacity, which will bring more downward pressure on industries," MPI said in a statement released on Monday.
A slowing economy, shrinking demand and overcapacity have forced Chinese steel mills to slash output or shut permanently, as the government aims to shift economic growth towards more consumption rather than heavy investment.
China's apparent crude steel consumption fell 3.4 percent from a year ago to 738.3 million tonnes in 2014, the first drop since 1981, according to the China Iron & Steel Association.
China's steel output hit a record 822.7 million tonnes in 2014.
(Reporting by Ruby Lian in Shanghai; CoCo Li and Nicholas Heath in Beijing; Writing by Josephine Mason; Editing by Joseph Radford)
