Chinese steel futures edged higher on Tuesday as investors returned to the market cautiously hoping that output cuts by steel mills would help ease swelling inventories, but gains were capped by expectations that the reduction would be short-lived.
The most active rebar contract for January on the Shanghai Futures Exchange had risen to 3,770 yuan per tonne by 0751 GMT, up 0.43 percent from the previous day. Rebar prices fell about 7 percent over the three weeks to July 27.
"News that steel mills have begun to cut production is supporting prices. The market has been full of negative news for a while and finally something positive has emerged," said a trader in costal Shandong province. "But the overall market fundamentals haven't improved much. I don't expect a bigger recovery until end-August."
China's small and medium-sized steelmakers are stepping up maintenance in an effort to trim production and stem losses following a slump in steel prices. The cuts have buoyed hopes that the supply overhang would soon ease.
But some experts warned that the cuts may be short-lived.
The China Iron and Steel Association (CISA) said Beijing's pro-growth measures in the latter half of this year could encourage mills to ramp up output again, recreating the same problems seen in the first-half.
Iron ore prices are hovering near a 30-month low and the market is divided over whether they will head further south.
Metal Bulletin Iron Ore Index .IO62-CNO=MB is the only one of three major indexes to post the first rise on Monday since July 9. Iron ore with 62 percent iron content rose 0.1 percent to $117.55 per tonne.
The Steel Index for the same grade .IO62-CNI=SI eased to $115 per tonne, its fourteenth consecutive fall and the biggest monthly drop since October. Platts IODBZ00-PLT fell 0.4 percent to $117.50.
"I don't think they have hit bottom yet," a Beijing-based iron ore trader said. "But I do agree that if mills are low on inventories and prices start to stabilise, then they may enter the market again and buy some cargoes."
A senior CISA official said iron ore prices were still high compared with steel product prices.
The remarks came even after spot iron ore prices slumped to the lowest in more than 2-1/2 years last Friday.
Profits at China's steel mills plunged 96 percent in the first half from a year earlier due to poor demand, with financing costs jumping 37 percent from a year earlier, CISA said on Tuesday.