China steel futures rose more than 1 percent on Tuesday, bouncing back from two-week lows in the previous session, supported by a bright demand outlook that
has kept steel production at a rapid clip.
A brisk construction sector has strengthened steel demand in China, the world's top consumer and producer, even during the usually slow summer period and expectations are that it will pick up even more pace in the next two months.
"In the September-October period demand usually picks up and we expect steel output rates to accelerate, which is positive for iron ore demand," Commonwealth Bank of Australia said in a report.
China's daily crude steel output has averaged above 1.9 million tonnes since late February, topping last year's daily rate of around 1.7 million tonnes. Industry data on Monday showed daily output at 1.947 million tonnes over the Aug. 11-20 period, up 0.3 percent from the prior 10 days.
The most-traded January rebar contract on the Shanghai Futures Exchange rose 48 yuan to 4,816 yuan a tonne by the midday break.
The contract fell as low as 4,762 yuan on Monday, its weakest since Aug. 11, tracking losses in Chinese equities and other commodities on worries over tighter liquidity after Beijing ordered banks to widen the base for calculating required reserves.
"Yesterday's drop was a knee-jerk reaction to the move. I think by now many in China are so used to these things they have learned to work with it. Outlook for steel demand is still bright," said an iron ore trader in Shanghai.
The iron ore physical market is also sustaining its strength, backed by Chinese mills restocking on the steel raw material and tight supplies from India, the world's No. 3 supplier.
"There's absolutely no weakening in the market," said another Shanghai-based iron ore trader who sells Indian cargoes to Chinese mills.
"Demand is strong, especially for low-grade ore, which brings down mills' costs dramatically," he said, adding that many Chinese mills are mixing low-grade iron ore with high-grade material to cut costs.
The trader said he recently sold an iron ore cargo with 55 percent iron content at $134 to $135 a tonne, cost and freight, to a steel mill located in China's Hebei province, up sharply from a previous deal of $126 to $127.
A higher grade 63.5/63 Indian material is likely to cross $190 a tonne soon, he said.
Monsoon rains have virtually halted iron ore shipments from India's west coast and eastern areas are suffering from congested ports and other logistics problems, traders said.
India sells the bulk of its cargoes via the spot market and fewer shipments from that country meant more business for other exporters such as Australia and Brazil, although miners from the two countries sell most of their output via long-term contracts, keeping spot supplies relatively thin.
"There's a lack of cargo availability from India. There's hardly any low-grade cargo available and even for medium and high-grade, supply is limited," said the second iron ore trader.
Iron ore with 62-percent iron content rose 25 cents to $180.50 a tonne on Monday, the highest since May 16, according to Platts IODBZ00-PLT.
A similar price index by Metal Bulletin .IO62-CNO=MB slipped 34 cents to $179.30.
Prices of forward swaps for nearby contracts rose, reflecting expectations that spot prices can extend gains in the short term