Iron ore, steel are again hot commodities as Chinese output curbs loom

Winnie Zhu and Martin Ritchie

Steel and iron ore are China’s hottest commodities right now, and it’s policy makers that are driving the gains. Steel futures went limit-up in Shanghai and iron jumped as investors bet that looming output curbs in the top producer’s main hub will further tighten a squeeze on supply.

Reinforcement bar surged as much as 6.3 per cent on the Shanghai Futures Exchange, the maximum allowed, before closing at a four-year-high. Iron ore rallied as much as 7.3 per cent, with the SGX AsiaClear contract in Singapore wiping out this year’s losses. Steelmakers and miners’ shares also rose.

“Steelmakers are facing government-ordered capacity curbs at a time when orders are full and inventories are relatively low,” Zhao Xiaobo, an analyst at Sinosteel Futures Co., said in a note oin Monday. Last week, nationwide holdings of rebar, a key product used in construction, shrank 1.9 per cent to near a seven-month low, according to Shanghai Steelhome E-Commerce Co.

Steel has been supercharged — boosting mills’ profit margins and stoking demand for iron — as moves on three fronts combine to support prices in the country that accounts for half of global production. First, a crackdown on illegal mills earlier this year shuttered some supply, strengthening the position of remaining producers. Second, demand has been underpinned by significant state-backed stimulus. And third, investors are eyeing signals the government will proceed with anti-pollution curbs over winter.

‘The production-curbs issue should not be taken lightly, given the potential to cause short-term disruption,’ says ANZ senior commodities strategist Daniel Hynes.

Rob Homer

“The production-curbs issue should not be taken lightly, given the potential to cause short-term disruption,” Daniel Hynes, senior commodities strategist at Australia & New Zealand Banking Group, said in advance of Monday’s jump. “It’s certainly getting to a point where downside risks are being reduced week by week.”

In Hong Kong, Angang Steel gained 6.5 per cent to its highest since April 2015, while Rio Tinto Group and BHP Billiton both hit February highs in intraday trade.

Winter curbs

Hebei province, the centre of China’s mammoth steel industry, will go ahead with plans that’ll allow for output cuts of as much as 50 per cent in the winter months to reduce pollution, its environmental protection bureau said on its Wechat account on Aug. 4. Citigroup estimated in a report received on Monday that daily production may sink by 8 per cent due to the crackdown.

Among steel products, it’s rebar that’s led the charge, rising 37 per cent this year to 3,928 yuan a ton, the highest close since March 2013, while coil has gained 22 per cent. Spot iron has been tugged higher, with 62 per cent content ore at $US76.17 a ton on Monday, according to Metal Bulletin.

“Environmental protection and capacity curbs are once again the focus of the market’s attention, boosting ferrous products,” said Fan Lu, a second analyst at Sinosteel Futures. “Transaction volumes have increased on the whole, and prices are holding onto gains.”

The surge has pumped up global prices while draining China’s steel exports, benefiting mills from Europe to the US and Asia. A gauge of producers is at its highest in six years and the big iron ore miners, Rio, BHP and Braz8il’s Vale, also enjoying the boom in their largest customer.

“There is a real possibility we go into 2018 still with some positive background from infrastructure and real estate,” said Hynes at ANZ. “These are huge infrastructure projects, which can provide a good level of demand for steel for a really extended period of time.”

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