Reuters quoted traders said Chinese steel mills are unlikely to snap up iron ore cargoes in the spot market when China returns on Thursday after a three-day break with a blurry demand outlook capping steel prices. The physical market for the steel raw material has been extremely quiet this week with top importer China off since Monday for a public holiday. There was also limited liquidity in the forward swaps market, helping exaggerate the upward price movements.
A Singapore-based iron ore trader said "I don't think you're going to see a rush of buying tomorrow from Chinese mills in the physical market. It's going to be very difficult for the market to climb USD 5 to USD 10 if steel prices don't move because it doesn't make financial sense for anyone to buy more ore." According to Steel Index iron ore with 62% iron content .IO62-CNI=SI steadied at USD 147.60 a tonne on Tuesday, holding near the five-month peak of USD 147.70 touched last week. Steel Index said "With China still on holiday, no one was looking to buy or sell spot iron ore."
There was very little action in the swaps market in Asia on Wednesday, with Hong Kong also away on a national holiday. Traders said with the swaps market still in backwardation, where prices for nearby delivery are higher than for forward months, the continued price gains are not necessarily pointing to expectations of higher spot rates. Another trader in Singapore said "It's more a reflection of two things. Firstly a bit of a short squeeze and the fact that we had very poor liquidity over the last few days which accentuated movements. There's not a lot of room for spot rates to go with steel at current levels."
Spot steel prices in China have mostly stabilised, but have been struggling to go higher amid sluggish demand, with steel inventories dropping at a slower than expected pace. The bank said steel inventory at Chinese traders has fallen 6% since peaking six weeks ago, according to recent estimates by investment bank Macquarie. But over 2007 to 2011 inventory fells an average of 14% six weeks after the first-quarter peak