Shanghai steel rallies as China steps up capacity cuts, lifts iron ore

10 January 2017

Shanghai steel futures jumped more than 5 percent to their highest price in nearly three weeks on Tuesday, supported by promises from China's top steelmaking province to further reduce production capacity.

Hebei, which accounts for about a quarter of China's total steel output, plans to slash 31.86 million tonnes of steel and ironmaking capacity this year, the official Xinhua news agency reported on Sunday.

That would be more than double the 14.62 million tonnes of steel capacity that Hebei cut last year.

"While smog concerns still threaten to lower steel output, a drive to cut outdated steel capacity is also pressuring production lower," Commonwealth Bank of Australia analyst Vivek Dhar said in a note.

The most-active rebar on the Shanghai Futures Exchange was up 5.5 percent at 3,123 yuan a tonne by 0320 GMT. The construction steel product touched 3,138 yuan ealier, its loftiest since Dec. 22.

A better outlook for the Chinese economy also bodes well for steel prices, said Helen Lau, analyst at Argonaut Securities."Overall, the stable downstream demand and reduced supply boost positive sentiment towards steel markets," said Lau.

China's economic growth last year was expected to be around 6.7 percent, said Xu Shaoshi, director of the National Development and Reform Commission. Beijing had targeted growth of 6.5-7.0 percent.

Rebar's rally lifted iron ore futures, also to their highest in three weeks, and could help stretch gains for spot iron ore prices.

Iron ore on the Dalian Commodity Exchange was last up 6.9 percent at 588 yuan a tonne, just off a session high of 593 yuan and nearly hitting its 8 percent exchange-set limit.

Iron ore for delivery to China's Qingdao port .IO62-CNO=MB climbed 1.9 percent to $77.73 a tonne on Monday, according to Metal Bulletin.