Chinese steel futures jumped over 6 percent to the highest in 31 months on Monday, as investors raised bets that strong property and infrastructure investment will sustain demand in the world's top consumer, spurring a similar rally in iron ore and zinc.
The red-hot rally in steel is bound to push iron ore above $80 a ton for the first time since October 2014, having lifted zinc to a nine-year high.
The rapid rise in ferrous metals as well as zinc and lead also reflect a rotation of funds away from fixed-income and into risky assets backed by optimism over global growth into 2017, analysts say.
Strong property sales in China along with the government's push for more infrastructure projects via its public-private partnership (PPP) fund have strengthened steel demand while supply is under control as Beijing intensely pursues capacity cuts, said Daniel Meng, analyst at CLSA in Hong Kong.
"In the first half of 2017, we will continue to have very strong steel prices because property sales remain very strong at least till October and PPP program is still in early stage and supply side should remain controlled," said Meng.
Construction steel product rebar on the Shanghai Futures Exchange rose as much as 6.4 percent to 3,238 yuan ($469) a ton, its loftiest since May 2014. Rebar closed up 4.7 percent at 3,188 yuan, gaining nearly 90 percent this year to end a six-year slide.
Amid surging prices, the exchange said it will limit the size of positions taken by non-members in some rebar futures from Tuesday.
China's real estate investment growth quickened in October to its highest since April 2014. The country's many infrastructure projects include a 247 billion yuan railway plan between Beijing, Tianjin, and Hebei, to integrate the three areas into a mega-city.
Iron ore futures also strengthened, with the most-traded contract on the Dalian Commodity Exchange rising 4.5 percent to end at 622.50 yuan.
That could push spot iron ore to well above $80 a ton, traders say, as buyers seek more high-grade material to cope with high coking coal prices. Iron ore for delivery to China's Qingdao port climbed 3.5 percent to $79.61 on Friday, just off the two-year high of $79.81 on Nov. 11, according to Metal Bulletin.
Zinc, used to galvanize steel, powered to a nine-year high on the London Metal Exchange and hit a six-year peak in Shanghai. Lead was swept up in the rally, charging to a five-year high, after a three-year decline.
While zinc is also benefiting from the better outlook for Chinese infrastructure projects, the rally also reflects increased risk appetite as the world looks to growth next year.
"There's a big rotation out of fixed income. That's huge money and it needs to find a home," said Daniel Morgan at UBS in Sydney.
"The world is looking more like it's on a growth footing," he said, citing a Republican-controlled U.S. Congress and a leadership reshuffle in China that may lead to policies supportive of growth.
"For those reasons you've probably had a big shift in sentiment toward a growth stance rather than a yield stance," said Morgan.
Graphic on China's steel making markets jump on upbeat infrastructure investment outlook here