China steel extends rally ahead of winter cuts, lifts iron ore

8 August 2017

Chinese rebar steel futures surged as much as 7 percent to their highest level in more than four years on Monday as buyers increased their purchases on expectations of reduced supply in the winter ahead due to Beijing-imposed capacity curbs.

Iron ore futures also jumped more than 7 percent.

China earlier this year ordered steel and aluminium producers in 28 cities to slash output during winter as it fights smog. Last week, the key steel producing area of Tangshan and other parts of Hebei province have said they will implement the order.

The government then called on steel producers to halve output in four northern provinces - Hebei, Shanxi, Shandong, Henan - as well as Beijing and Tianjin, during the peak winter heating months around late November to late February. The size of the output cuts will depend on how much each region has reduced its emissions.

"In anticipation of less supply of steel, there should be some traders and end-users bringing forward their purchase plan," said Richard Lu, analyst at CRU consultancy in Beijing.

"Because of expectations of reduced supply, prices may rise further in coming months, so it's better to buy now," Lu also said.

The most-active rebar contract on the Shanghai Futures Exchange climbed by its 7-percent exchange-set limit to a session peak of 4,013 yuan ($597) a tonne, its loftiest since April 2013.

The construction steel product was up 5.6 percent at 3,961 yuan by the midday break.

The strength in the steel market spilled over to raw material iron ore, with the most-traded iron ore on the Dalian Commodity Exchange rising as much as 7.3 percent to 587.50 yuan per tonne, the highest since March 21.

Despite the spike, traders believe there remains plenty of iron ore in China, and that could exert downward pressure on prices going forward.

"There's no rush among buyers to procure iron ore since there's a lot of cargoes available, both (fresh) seaborne cargoes and those (stocked) at ports," said a Shanghai-based trader.

Stockpiles of imported iron ore at China's ports stood at 139.15 million tonnes on Friday, according to data tracked by SteelHome.

The level was not far below the record 141.45 million tonnes reached in June.