Spot prices at over 2-week high as Chinese mills restock

SINGAPORE: Spot iron ore prices may build on recent gains this week as Chinese steel mills, encouraged by rising steel prices, restock the raw material.

Iron ore prices rose to more than two-week highs at the end of last week as Chinese buyers, the world's biggest consumers of the steelmaking component, returned to the market, and further gains may be in store with Shanghai steel futures at their highest in a month on Monday.

But traders said weekend data showing China's annual inflation rising to a faster-than-forecast 6.4 percent in June, the highest in three years, fanned fears Beijing may continue to raise interest rates, dashing hopes last week's rate hike could be the second to the last for 2011.

Tighter liquidity has made it difficult for Chinese steelmakers to fund operations, including the purchase of raw materials like iron ore.

Despite concerns about a slowing economy, China needs to further increase interest rates to tame inflation because a relaxation of tightening measures would ignite worries about stagflation in the fourth quarter, Chinese government economists said in remarks published on Monday.

"Stocks of iron ore at small to medium-sized mills have gone down to 15 days, about half of their normal inventory, so some of them are coming back to the market," said an iron ore trader in China's eastern Shandong province.

Iron ore with 62 percent iron content rose $1.71 to $171.47 a tonne on Friday, according to the Metal Bulletin's index, its highest since June 20.

A similar benchmark by The Steel Index gained 50 cents to $171.20, a level not seen since June 22.

Platts 62 percent index was unchanged at $174.

Firmer steel prices have spurred Chinese mills into replenishing stockpiles.

COPYRIGHT REUTERS, 2011