Shanghai steel futures hit their highest since June on Wednesday, before paring gains at the close, amid a pickup in Chinese demand that could strengthen gains in raw material iron ore. Steel prices in China, the world's biggest steel consumer and producer, have been rising as growing domestic orders and drawdowns in inventories suggest demand is on the mend as warmer weather spurs construction activity. A firmer steel market has been behind this year's 35-percent rally in spot iron ore, far outpacing gains in other commodities.
The most-traded rebar, a construction steel product, on the Shanghai Futures Exchange rose as much as 2,240 yuan ($345) a tonne, its strongest since June 25 last year. The contract closed at 2,193 yuan, up 1.5 percent. The number of Chinese mills seeing an increase in domestic orders reached the highest since July 2011, said analysts at Macquarie, citing the results of their latest China Steel Survey. "(That suggests) underlying demand is quickly catching up with the previous expectations of a coming pickup in orders," they said.
Rising steel prices have boosted profitability among Chinese mills which should push them to produce more amid relatively low levels of steel inventory, indicating that the current pace of demand may be outstripping that of production, Macquarie said. "It thus looks likely that steel prices could continue to rise from current levels, which are already 30-50 percent above the troughs in late-November," the bank said.
Inventory of steel products held by Chinese traders dropped to 11.71 million tonnes on March 18, from 12.09 million tonnes in the previous week, according to industry consultancy Mysteel. Richard Lu, an analyst at CRU consultancy in Beijing, said the price gains could last through May as hotter weather from June slows construction activity.
Despite firmer steel pricing, iron ore on the Dalian Commodity Exchange slipped 2 percent to close at 411 yuan a tonne after a recent rally. Dalian iron ore has risen 44 percent for the year, while Shanghai rebar has gained 25 percent. Iron ore for immediate delivery to China's Tianjin port dropped 0.2 percent to $57.90 a tonne on Tuesday, according to The Steel Index. The spot benchmark has gained 18.4 percent so far in March, on course for its biggest monthly rise December 2012. It has risen 35 percent for the year.