China steel begins June on shaky ground amid weak demand

1 June 2016

Shanghai steel futures dropped to near three-month lows on Wednesday, extending losses at the start of June after ending May with their biggest-ever monthly fall amid weaker Chinese demand.

Iron ore steadied, recovering from intraday losses, helped by expectations appetite for the steelmaking raw material will remain strong as steel mills, which had resumed production in response to a price rally in March and April, look set to keep running.

Data showing growth in activity in China's manufacturing sector remained weak in May weighed on investor sentiment, as a seasonally slow period for steel demand in the world's top consumer begins.

Rainy weather in the southern part of China this month would curb construction activity, said a Shanghai-based trader. That would dent steel consumption which could soften further when summer kicks in over the next months, he said.

"Steel prices should continue to trend downward because the oversupply situation will get more serious over the next few months," the trader said.

The most-traded rebar, used in construction, on the Shanghai Futures Exchange closed down 2.2 percent at 1,955 yuan ($297) a tonne, after falling as far as 1,939 yuan earlier. The contract touched 1,894 yuan on Monday, the lowest since March 4.

Iron ore on the Dalian Commodity Exchange gained 0.3 percent to 348.50 yuan a tonne. It touched a three-month low of 333 yuan on Monday.

Rebar and iron ore futures lost about a quarter of their value in May, their steepest such declines since they were launched in 2009 and 2013, respectively.

The May surveys on China's economy, which showed weaknesses in both manufacturing and services, underline the challenges facing the world's No. 2 economy, said Helen Lau, analyst at Argonaut Securities in Hong Kong.

"We expect China's government to continue to implement supportive measures to protect growth and ensure economic recovery," Lau said in a note.

China's steel production should remain high as mills that have recently resumed production are likely to continue operating over the next few months, said the Shanghai trader.

"So demand for iron ore will still be there until mills start to feel the pain and try to reduce production," he said, adding this could keep spot iron ore at around $50 a tonne in the short term.

Iron ore for immediate delivery to China's Tianjin port dropped 1.4 percent to $49.60 a tonne on Tuesday, according to The Steel Index, the lowest since Feb. 29.

The spot benchmark fell 24 percent in May, the most since October 2011.


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