Iron Ore-Indexes rise, but swaps fall on likely steel cuts

Mon Jun 13, 2011 3:55am GMT

* China power shortages seen cutting steel output 30 pct
* Swaps decline on likely output cuts; spot firm
By Nick Trevethan

SINGAPORE, June 13 (Reuters) - Spot iron ore prices extended gains for a fourth day on Monday, but looming power shortages that could restrict steel output in China, the world's top steel producer, weighed on forward swaps prices.

Key iron ore indexes, based on Chinese spot prices, rose for a fourth day on Friday after losing around 6 percent last month.

The Steel Index's 62 percent benchmark .IO62-CNI=SI rose 50 cents to $173.10 a tonne and Metal Bulletin's similar gauge .IO62-CNO=MB gained 72 cents to $172.71.

Platts 62 percent index IODBZ00-PLT rose 25 cents to $174.00. Indian ore with 63.5/63 percent iron content was quoted at $179-$181, Chinese consultancy Mysteel said, while Umetal quoted prices at $178-180 unchanged from Friday.

But prices of forward swaps mostly fell on expectations that power shortages in China could depress steel output and therefore prices.

The Singapore Exchange-cleared June contract fell $1.00 to $172.50 a tonne, July dropped $1.58 to $171.50 and August lost $1.75 to $170.67.

"Amid concerns on inflation and tightening monetary policy, power shortages are emerging as an additional challenge in China," Deutsche Bank said in a note.

"A growing number of cities in the country are experiencing the worst power shortage in at least seven years. So far no production cuts or shutdowns in heavy industries has been reported. Nevertheless, we could see production disruption if power shortages persist and worsen.

"In steel, we believe potential disruption could come from Jiangsu, Henan, Hunan and Jiangxi provinces, which represent around 30 percent of national output."

Iron ore imports by China, the world's No. 1 consumer of the steelmaking ingredient, rose a marginal 0.8 percent to 53.3 million tonnes in May from the previous month, data showed on Friday.

Traders expect imports to fall in June along with the seasonal weakness in China's steel market during the summer along with the risk on steel output from the state's power rationing seen lasting through September.

Shanghai rebar futures fell 50 yuan or 1 percent to 4,804 yuan per tonne by 0315 GMT.

Demand prospects also suffered a blow after news that Chinese banks lent 551.6 billion yuan in local currency loans in May, missing market forecasts for 610 billion yuan, the People's Bank of China said.

Annual growth in China's broad M2 measure of money supply edged down to 15.1 percent in the month from April's 15.3 percent. The median forecast of economists was for a 17.1 percent rise in outstanding loans and a 15.4 percent increase in M2.

"The slowing money supply poses a risk to iron ore and steel prices. But the bearish risk posed by reduced spending could be offset by what it means for inflation," said a trader in Singapore.

"The fall in money supply suggests that price pressures may reduce in the months ahead."

(Editing by Clarence Fernandez, sourced Thomson Reuters)