China's steel supply squeeze lifts rebar, iron ore for 4th day

12 January 2017

Chinese rebar steel futures rose for a fourth straight day on Thursday amid Beijing's campaign to shave excess steel production capacity, helping stretch gains in raw material iron ore.

The rally in both commodities extended last year's surge that came after years of losses, with analysts saying steel prices may remain strong as China's resolve to address overcapacity tightens supply.

China this week unleashed its boldest reform plan so far for the steel sector, saying it will eliminate all production of low-quality steel products by the end of June.

The world's top steel producer also halted eight steel projects in top steelmaking province Hebei, according to local media reports.

"While some of the push to close steel overcapacity reflects supply-side policy, the added impetus over recent weeks reflects growing pollution concerns," Commonwealth Bank of Australia analyst Vivek Dhar said in a note.

But Dhar said that while a resulting decline in steel output "may be positive for steel prices, (it) bodes negatively for iron ore demand and prices."

The most-active rebar on the Shanghai Futures Exchange was up 2.3 percent at 3,245 yuan ($469)a tonne by 0306 GMT, after earlier hitting its strongest level since Dec. 19 at 3,254 yuan.

Iron ore on the Dalian Commodity Exchange was up 2.3 percent at 611.50 yuan per tonne, having initially touched a four-week top of 615 yuan.

Stronger futures have spurred a similar rally in spot iron ore prices, with the market benchmark back above $80 a tonne for the first time this year.

Iron ore for delivery to China's Qingdao port .IO62-CNO=MB climbed 1.2 percent to $80.41 a tonne on Wednesday, rising for a third day, according to Metal Bulletin.

But traders said there had not been a lot of Chinese steel mills building iron ore inventories ahead of the week-long Lunar New Year break at the end of January."Supply is still quite good and I don't think you will see any aggressive restocking," said a Shanghai-based trader.

Stocks of imported iron ore at major Chinese ports reached 116.7 million tonnes on Jan. 6, the biggest since at least 2004, according to SteelHome consultancy.