SINGAPORE: Iron ore may extend modest gains this week as more Chinese steel producers return to the spot market to fill stockpiles, but a sluggish domestic steel market is likely to cap any price rise.
Chinese steel prices have been largely steady so far this year with activity in the domestic construction sector, a heavy steel user, yet to fully resume.
"Construction activity is still low because it's still winter in the northern part of China and we only expect steel demand to return later this month or in March," said a Shanghai-based iron ore trader.
Mirae Asset Securities said it was keeping its "underweight" stance on China's steel sector this year, particularly the large state-owned steel mills.
"The structural driver of steel demand - urbanization - remains a valid long-term call, but it may halt in 2012 if the central government continues its crackdown on house prices," the brokerage said in a note.
China's slack steel demand meant a slow start for iron ore this year, gaining a modest 3.5 percent versus a more than 12 percent rise for copper, another key construction material.
The most-traded May rebar contract on the Shanghai Futures Exchange has risen 3 percent so far this year, and little changed at 4,337 yuan a tonne by the midday break on Monday.
Iron ore with 62 percent iron content rose 0.1 percent to $143.30 a tonne on Friday, according to the Steel Index, the highest since Nov. 22.
"Iron ore prices could rise further this week with some more mills going back to the market and traders taking positions," said the Shanghai trader.
But a sizeable amount of iron ore at Chinese ports, material that is readily available and which buyers can buy in smaller tonnages unlike fresh spot cargoes, may limit appetite for more imports, traders said.
Stockpiles of imported iron ore at major Chinese ports reached 101.49 million tonnes last week, with shipments from the three biggest exporters -- Australia, Brazil and India -- rising, Chinese consultancy Mysteel said on Friday.
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