China steel prices retreat from record peaks, drag iron ore lower

China's steel futures inched lower on Thursday, retreating from record highs touched in the previous session, as market participants stepped back to assess if the strong downstream demand seen in recent days will be sustained.

Analysts, however, said moves to rein in steel output in China - the world's top producer and exporter of the construction and manufacturing material - should keep any pullback in prices in check.

The most-active construction steel rebar for October delivery on the Shanghai Futures Exchange was down 0.1% to 5,122 yuan ($782.64) a tonne by 0330 GMT.

Hot-rolled coil, used in car bodies and home appliances, dropped 1.5% to 5,503 yuan a tonne.

As improved steel profit margins prompted Chinese mills to ramp up output, Sinosteel Futures analysts said, "a high level of destocking must be maintained to help support high prices".

Robust domestic demand fuelled a rally in steel prices recently, along with concerns over output curbs as China rolls out new policies focusing on tighter environmental control that limits production capacities of mills.

Several heavy-polluting mills in China's top steelmaking city of Tangshan have been subjected to more severe production restrictions that could also be imposed in other areas.

"This is the first time the Chinese government is looking at the steel industry from an environmental angle on nationwide basis," J.P. Morgan analysts said in a note.

"We are seeing increasing prospects that these structural changes will lead to long-term improvement in steel margins."

The pullback in steel prices dragged raw material iron ore futures lower, with the most-active September contract on the Dalian Commodity Exchange down 0.7%.

Iron ore on the Singapore Exchange slipped 0.6%. Spot iron ore in China traded at a five-week high of $170.50 a tonne on Wednesday, according to SteelHome consultancy.

Dalian coking coal lost 0.8% and coke shed 0.2% Shanghai stainless steel advanced 0.2%.