Shanghai steel rebar futures fell for a third day on Friday and pared their weekly gains on concern Chinese demand is at risk from a slowing economy, which could similarly curb appetite for raw material iron ore. Baoshan Iron and Steel, China's biggest steelmaker by market value, will cut May prices for its major products after keeping them flat in April, moving to spur demand in what in past years has been a brisk consumption month for steel.
Baosteel mostly makes flat steel products used in manufacturing cars and appliances. Factory activity was off to a slow start this year in China and exports fell for a second straight month in March. Chinese Premier Li Keqiang has ruled out major stimulus to fight short-term dips in economic growth. The most-active rebar for October delivery on the Shanghai Futures Exchange closed 0.7 percent lower at 3,360 yuan ($540) a tonne, slipping further from a one-month high of 3,425 yuan reached on Tuesday.
For the week, rebar was up just 0.4 percent. Shanghai hot-rolled coil futures, launched in March 21, eased 0.6 percent to 3,434 yuan a tonne. Baosteel's price cut shows it "has no confidence in future steel price recovery", UOB-Kay Hian Securities senior analyst Helen Lau said in a note. The recent gains in steel prices were spurred by expectations of seasonally strong demand in April and May, with stockpiles of steel products held by Chinese traders having fallen over the past five weeks.
The price cut by Baosteel, whose pricing moves are tracked by the rest of China's steel sector, suggests the outlook for demand is not as bright as many had hoped. That could slow China's steel output and consequently the need for iron ore, with a recent rally stalling as the price closed in on $120 a tonne. "Mills have to ensure that when they buy cargo they can make money off steel since there won't be too much support from the government," said an iron ore trader in Shanghai.
"But I think iron ore has risen too fast too soon and there could be more downside risk from here with steel prices coming off now." Iron ore for immediate delivery to China dropped 0.3 percent to $119.10 a tonne on Thursday, a day after touching a six-week peak, based on data from Steel Index. Iron ore is up almost 3 percent for the week so far, on track for its fourth consecutive weekly increase, its longest such streak since July 2013. But traders say prices will struggle to top $120.
"There's not a lot of buying interest at $120 and above. Mills are still very cautious. I think we may be stuck between $113 and $118," said another Shanghai-based trader. Iron ore contract for September delivery on the Dalian Commodity Exchange fell 0.7 percent to settle at 814 yuan a tonne, but gained 1.5 percent for the week. Traders say an approaching cyclone in Australia may not hit the top iron ore exporter's mining areas, particularly the Pilbara belt in the western part of the country.
Residents and tourists on Friday were evacuating parts of Australia's north-east coast, as the strongest cyclone in three years was poised to hit land later in the day, bringing destructive winds and flash floods. Cyclone Ita, a category five storm, is expected to make landfall north of the tropical city of Cairns, the Australian Bureau of Meteorology said.