Shanghai steel futures jumped nearly 3 percent on Thursday after China's top steelmaking city ordered mills to reduce output a month ahead of schedule to meet air quality targets as the country battles smog. Strong steel prices helped lift steelmaking raw materials coking coal and iron ore, although the price of iron ore did not rise too far from a 3-1/2-month low hit earlier in the day.
The most-traded rebar on the Shanghai Futures Exchange, for January delivery, closed up 2.8 percent at 3,667 yuan ($557) a tonne, after climbing as far as 3,700 yuan during the day. Steel companies in Tangshan, located in heavily polluted Hebei province, were ordered to slash sintering output by 50 percent from Thursday, according to an October 11 notice from the municipal government.
Sintering processes iron ore into a product prior to steelmaking and is a major cause of pollution. Tangshan is the latest city to launch a campaign to tackle toxic air ahead of the previous deadline of November 15, when winter heating systems in China are switched on.
The cuts are expected to last through March and around 30-35 million tonnes of Chinese crude steel production could be taken offline, Commonwealth Bank of Australia analyst Vivek Dhar said in a note. That translates to 42-49 million tonnes of iron ore consumption, equivalent to about 3 percent of the global seaborne iron ore market, he said.
The most-active January iron ore contract on the Dalian Commodity Exchange closed up 0.3 percent at 441.50 yuan a tonne, supported by firmer steel prices. The raw material earlier dropped as much as 3.3 percent to 425.50 yuan, its weakest since June 27. Coking coal futures fared much better, rising 3.8 percent to close at 1,142 yuan per tonne.