Shanghai steel futures reversed course and closed lower on Thursday, as higher inventories of the construction and manufacturing material in China offset an early rally spurred by a monetary policy easing measure by the country's central bank.
The Shanghai Futures Exchange's most-traded construction steel rebar contract ended down 0.3% at 3,547 yuan ($509.44) a tonne, after scaling a 5-1/2-month peak during the morning session. The most-active hot-rolled steel coil contract slipped 0.5% to 3,571 yuan a tonne, retreating from a six-month high.
Steel futures rallied early in the first trading session of 2020, a day after the People's Bank of China announced a reduction in the amount of cash that all banks must hold as reserves, freeing up more funds to shore up a slowing economy.
"With the government announcing more measures to support the economy, people don't expect demand (for steel) to be really very weak this year," said Richard Lu, senior analyst at commodities intelligence firm CRU in Beijing.
However, the cut in banks' reserve requirement ratio "signals Beijing's heightened concerns on economic growth headwinds, credit contraction pressure in some regions, and an upcoming liquidity shortage ahead and during the Lunar New Year holidays," analysts at Nomura said in a note.
While the anti-smog orange alert issued by the nation's top steelmaking city of Tangshan should support steel prices, Lu said slowing construction activities in China over winter is expected to weaken demand particularly for rebar.
Indicating tepid demand, China's rebar inventory rose steadily for four straight weeks while stocks of hot-rolled coil, used in cars and home appliances, also picked up towards the end of December, SteelHome consultancy data showed.
Tangshan issued the second-highest pollution alert on Thursday, requiring companies to take action to cut emissions, including restricting output.
Despite the smog alert, iron ore extended gains due to steel mills' restocking demand amid a reduced first-quarter ore output flagged earlier by Brazilian miner Vale SA.
The most-traded iron ore contract on the Dalian Commodity Exchange closed 1.4% higher, while Singapore Exchange's front-month February contract was up 1.3% in afternoon trade.
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