Chinese iron ore futures slid more than 2 percent on Thursday, reversing gains that pushed the commodity to record high, as steel prices made a similar U-turn in afternoon trading. Expectations of a pickup in construction activity and steel supply tightening in China, the world's largest producer, have helped steel prices rally this year, fuelling a rapid rise in iron ore markets.
The most-active rebar on the Shanghai Futures Exchange closed down 0.9 percent at 3,381 yuan ($493) a tonne, after earlier racing to a more than two-month high of 3,509 yuan. Iron ore on the Dalian Commodity Exchange dropped 2.4 percent to end at 685.50 yuan per tonne. The steelmaking raw material touched 721 yuan in afternoon trading, its highest intraday level since the exchange launched the futures contract in October 2013.
Still, rebar has gained 16 percent so far this year and iron ore has risen 26 percent. To improve air quality during the annual meeting of the National People's Congress in early March, governments in Beijing, Tianjin and Hebei have released orders for steel mills to cap production from late February to early March, Chinese commodities firm Xiben New Line reported. The Beijing-Tianjin-Hebei region produced around 210 million tonnes of crude steel last year, or 26 percent of China's total output, analysts at Morgan Stanley said in a note.
If half of steel production in the region is capped for 20 days, the decline in production could be 5.8 million tonnes, they said. "In this case, it may create short-term supply tightness and hence prices reactions as demand recovers starting from late February," they said. "(But) overall, we expect the potential impact to be short-lived." Iron ore for delivery to China's Qingdao port dropped 0.7 percent to $91.05 a tonne on Wednesday, according to Metal Bulletin.