Iron ore futures in China climbed nearly 2 percent on Thursday with steel mills looking to replenish inventories of the raw material after a week-long National Day break. However, gains could be short-lived, traders and analysts warned, as a weak steel market forces producers to curb production, cutting demand for iron ore.
The most-traded iron ore for January delivery on the Dalian Commodity Exchange closed up 1.9 percent at 373.50 yuan ($59) a tonne, after rising as high as 379 yuan. Other China-traded commodities such as copper and nickel also spiked along with equities, catching up to a global rally in risk assets.
"Because everybody's back from holidays, there could be some mills who need to replenish their inventory," said an iron ore trader in Shanghai. "So iron ore prices could see some gains this week and next." But soft Chinese steel prices, dragged down by continuously weak demand in the world's top consumer, could cut short an iron ore rally.
There has been no pickup in steel demand this month, usually a seasonally brisk period, the Shanghai trader said, blaming a slowdown in the overall economy. "I think the trend would continue for the rest of the year," he said. Construction-used rebar on the Shanghai Futures Exchange ended unchanged at 1,826 yuan a tonne. The most-active January contract touched a record low of 1,815 yuan on September 30, just before China's October 1-7 holiday.
Spot iron ore prices steadied at around $54 a tonne during the Chinese break amid a lack of physical trading activity. The 62-percent grade ore benchmark stood at $54.40 a tonne on October 7, unchanged from September 30, according to The Steel Index. A slowdown in China's steel production will dampen iron ore demand, while oversupply of the steelmaking commodity will worsen next year, said Helen Lau, analyst at Argonaut Securities in Hong Kong. "China's iron ore production reduction will not offset the production increase from overseas top producers," said Lau, who sees the price dropping to $50 a tonne next year from an estimated $58 this year.