China iron ore extends gains on demand outlook, analysts warn of risk

21 April 2018

Chinese iron ore prices on Friday extended gains from a nearly 7-percent jump in the previous session, on track for their strongest week since December on expectations of increasing demand for restocking at steel mills.

The most-active iron ore futures on the Dalian Commodity Exchange had risen 1.3 percent to 471.5 yuan ($75.04) a tonne by 0230 GMT, set for their biggest weekly advance in 17 weeks. They soared as much as 6.5-percent during afternoon trading on Thursday.

“The market has been in a party mood since the central bank said to it was cutting (bank reserve requirements). On a fundamental basis, the market expects some restocking demand for raw materials since mills have incentives to churn out output amid fat margins,” said a Shanghai-based iron ore trader.

Average output profits at steel mills are currently around 681 yuan a tonne in top steelmaking city Tangshan, according to Mysteel consultancy.

China’s central bank earlier this week said it would cut the cash most commercial banks must hold as reserves, potentially adding liquidity to the market.

On Thursday, key iron ore supplier BHP Billiton Ltd cut its 2018 fiscal year output guidance for iron ore by 2 percent to 272-274 million tonnes, citing issues in its railroad car unloading system.

“Long-repressed iron ore prices showed a ... rebound after BHP’s statement. However, the amount of output BHP will cut will have a limited impact of global supplies,” said analysts at CITIC Futures in a note in Mandarin, warning investors should watch out for risks as iron ore prices have climbed too fast.

“The market is being moved by speculative money. Many traders who used to invest in rebar have shifted to raw materials,” said the Shanghai trader. He declined to be identified as he was not authorised to speak with media.

Construction rebar contracts for October delivery on the Shanghai Futures Exchange slid 0.2 percent to 3,487 yuan a tonne. They have gained 10 percent over the past three weeks.

Spot rebar prices went up by 0.6 percent to 4163.3 yuan a tonne on Thursday, according to Mysteel data.

Coking coal prices edged up 0.4 percent to 1,163.5 yuan a tonne, while coke futures dipped 0.2 percent to 1,868 yuan.