Chinese steel futures surged nearly 7 percent on Friday, lifted by growing efforts among Chinese cities to curb output ahead of winter, spurring a similar rally in raw materials iron ore and coking coal. Coking coal climbed as much as 8 percent to hit its exchange-set ceiling, while iron ore jumped 5 percent. But analysts doubt the sharp gains in prices of the raw materials will be sustained as the steel production cuts could dent demand.
"The market is still driven by production cuts amid Beijing's push to fight smog as we see some cities have implemented output curbs one month ahead of the plan," said Yu Yang, analyst at Shenyin & Wanguo Futures in Shanghai. "So when steel prices rise, mills have bumper profits and this has driven up raw materials too." China's top steelmaking city of Tangshan became the latest to enforce production cuts this month, ahead of the previous deadline of November 15, when winter heating systems in China are switched on.
Tangshan ordered its steel mills to halve sintering output by 50 percent from Thursday. The most-active rebar on the Shanghai Futures Exchange closed up 6.6 percent at 3,815 yuan ($580) a tonne, adding to Thursday's 2.8-percent spike. The steel production cuts mostly cover China's northern cities, and mills in other areas "are going to have to increase utilisation and output to meet overall demand in the country", said ANZ commodity strategist Daniel Hynes. The most-traded iron ore contract on the Dalian Commodity Exchange rose 5.1 percent to 455.50 yuan per tonne.
Coking coal jumped 8 percent upside limit before closing 7.5 percent higher at 1,196.50 yuan a tonne. Coke climbed 5.1 percent to 1,890 yuan. "I'm not sure if the rally can be sustained," said Yu at Shenyin & Wanguo Futures. "Steel mills cut production, which means appetite for coking coal and coke will also drop. We can't rule out the possibility that coking coal and coke might drop again." China's iron ore imports rose 11 percent in September from a year ago to a record 103 million tonnes.
The import surge suggests strong Chinese demand for high-quality iron ore particularly from top suppliers Australia and Brazil, said Hynes. "I think import demand will remain very strong but there are certainly some headwinds for this type of growth to continue, in part because we're expecting to see a slowdown in export growth out of Australia and (Brazil's) Vale has indicated that Q4 volumes will be lower."
Iron ore for delivery to China's Qingdao port rose 0.7 percent to $60.09 a tonne on Thursday, according to Metal Bulletin, recovering from Wednesday's 3-1/2-month low.
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