Iron Ore-Shanghai rebar ticks higher; output cuts weigh

Tue Nov 8, 2011

* China's Oct daily steel output at lowest since Jan
* Sixth day of gains for iron ore, but could lose steam (Updates rebar price)
By Manolo Serapio Jr

SINGAPORE, Nov 8 (Reuters) - Shanghai steel futures edged up on Tuesday, regaining ground after sliding over the past three months, but output cuts spurred by weaker steel demand in top producer and consumer China limited gains.

China's average daily crude steel output in October stood at 1.786 million tonnes, the lowest since January, data from the China Iron and Steel Association showed on Monday. That was down 5.5 percent from the 1.89 million tonnes daily average for September as mills scaled back production to cope with slower demand.

More steel mills are expected to cut production and prices towards the end of the year to curb losses, likely taking the steam out of raw material iron ore, which gained for a sixth straight day on Monday after sliding more than 30 percent last month.

The most-active May rebar contract on the Shanghai Futures Exchange closed up 0.9 percent at 4,141 yuan a tonne. Rebar lost more than 16 percent over the three months from August to October.

Iron ore with 62 percent iron content climbed 1.7 percent to $125 a tonne on Monday, according to the Steel Index .IO62-CNI=SI, the highest since Oct. 26.

Iron ore has gained 7 percent in the past six sessions, after shedding nearly 31 percent in all of October.

"There's some stability in the market across the board, but I don't think prices will go up very far," said a physical iron ore trader in Singapore, adding he sees $135 as the "upper limit" for iron ore.

Sellers upped price offers in China further on Tuesday by $1-$3 a tonne. Australian 61.5-percent grade Pilbara iron ore fines rose $2 to $127-$130 a tonne, and 63-grade Newman fines increased $3 to $130-$132, said Chinese consultancy Umetal.

Indian 63.5/63 fines rose $1 to $134-$136 a tonne, said Umetal. All prices include freight cost.

Most steel mills in China may be done with restocking ore since they don't need as much raw material given the output cuts and with credit access still tight, said an iron ore trader in the port city of Rizhao in China's eastern Shandong province.

"It's almost winter and demand for steel products is really bad during winter," he said.

Most construction activities in China either slow or stop during winter and this will restrain demand for steel, already slowed by tighter credit as Beijing makes fighting inflation its top priority.

Still, most iron ore traders are holding off cargoes, waiting for better prices to unload material some of which were purchased before the market's freefall in October.

"Some traders who got stuck at higher levels and are holding high inventories are holding back some cargoes hoping that the market will go up further," said the Singapore-based trader.

"But the problem is prices can easily fall back again. When steel futures drop, all this optimism will certainly disappear."

(sourced Reuters)