Output push at China steel mills lifts iron ore to one-month high

6 August 2015

Steel makers in China may be ramping up output before the government orders production cuts at some mills to ensure clean air in Beijing for a parade, according to UBS Group, which said the increase may be boosting iron ore.

"I have heard there may have been some modest pick-up in steel production ahead of enforced cutbacks in late August, early September for World War II end commemoration in China," analyst Daniel Morgan said on Wednesday.

Steel output in the world's top producer is set to be disrupted this month and in September, as mills around Beijing are ordered to cut supply to ensure blue skies for the parade, which marks the end of World War II as well as a sports event. Iron ore dropped to a six-year low below $US45 ($61) a metric tonne in early July as Rio Tinto Group and Vale raised output into an oversupplied market, before rallying back into a bull market. UBS' Morgan said prices of about $US50 a tonne are reasonable.

"We could easily see sub-$US45 a tonne as part of the normal volatility in this space, but I don't think prices would sustain levels below $US40," Morgan said in an email, referring to the cost of benchmark supplies landed in China.

Ore with 62 per cent content in Qingdao entered the bull market last week, rebounding from the low of $US44.59 a dry tonne on July 8, according to Metal Bulletin. Prices rose 2.7 per cent to one-month high of $US56.78 on Wednesday. They're still 20 per cent lower this year.

Remembrance and sport

China's leadership is scheduled to host the parade in Tiananmen Square on September 3 to commemorate the 70th anniversary of Japan's surrender. Before that, Beijing will host the world track and field championships from August 22 to 30.

As much as 6 million tonnes of steel production may be cut, more than was lost last year when similar curbs were used for a global summit, according to Mysteel Research's chief analyst Xu Xiangchun, who cited talks with policymakers and mills. The restrictions will cover Hebei, China's biggest steel-producing region, as well as Beijing and Tianjin.

The output disruption may reduce demand for iron ore by about 10 million tonnes, ANZ Banking Group wrote in a note on Monday. Macquarie Group said the move risked spurring volatility in iron ore prices.

Iron ore and steel prices in China climbed in recent days. Iron ore futures advanced 2.9 per cent to close at 377 yuan ($82) a tonne in Dalian on Wednesday, the highest in a month, as spot rebar advanced for an eighth day to cap the longest rising streak since October.