Shanghai steel has best week in five on supply fears, construction hopes

17 February 2017

Shanghai rebar steel futures climbed more than 1 percent on Friday to trade near a two-month high, extending recent gains on expectations of tighter supply and a demand pick-up as China boosts infrastructure spending.

The price of the construction steel product posted its best weekly gain in five, with the rally also pushing up Chinese iron ore futures this week to the highest since their launch in October 2013.

The most-active rebar on the Shanghai Futures Exchange closed up 1.5 percent at 3,473 yuan ($506) a tonne. The contract rose 5.5 percent this week after hitting 3,509 yuan on Thursday, its strongest since Dec. 12.

On the Dalian Commodity Exchange, the most-traded iron ore rose 0.4 percent to 702 yuan per tonne. The steelmaking raw material touched a record high of 721 yuan on Thursday and gained 4.7 percent this week.

Traders are building stocks of steel products on expectations of reduced supply after the Chinese government, in efforts to control smog, told mills in the Beijing-Tangshan-Hebei region to limit their utilisation capacity to 50 percent if air quality deteriorates, said Richard Lu, analyst at CRU consultancy in Beijing.

If half of steel production in the region is capped for 20 days, the decline in production could be 5.8 million tonnes, analysts at Morgan Stanley said in a note on Tuesday.

"People have very strong expectations on infrastructure demand. They think the Chinese government will boost infrastructure investment to support economic growth this year," said Lu.

Inventory of rebar in major Chinese cities stood at 8.2261 million tonnes as of Feb. 10, the most since April 2014, according to data tracked by SteelHome SH-TOT-RBARINV.

"If demand doesn't pick up as expected, there might be a lot of surplus steel in the market and prices might fall," said Lu.Iron ore for delivery to China's Qingdao port .IO62-CNO=MB fell 1.1 percent to $90.06 a tonne on Thursday, according to Metal Bulletin.

The spot benchmark has declined since touching a 30-month peak of $92.23 on Monday, but was still up 4 percent so far this week.