Iron Ore Rebounds as China Mills Churn Out Steel at Record Pace

(Bloomberg) -- Iron ore futures climbed back above $200 a ton as soaring steel production in China showed there’s no sign of the industry cooling despite government attempts to rein in output from last year’s record of over 1 billion tons.

Crude steel output in April rose to 97.9 million tons to hit monthly and daily run-rate records. The robust pace of production also lifted the year-to-date tally to 375 million tons, a 16% jump compared to same period last year. This comes as iron ore stockpiles at Chinese ports declined for the third week, indicating strength in demand.

Officials in China have restated their commitment to control pollution in its vast steel industry, with fresh output restrictions ordered in the mill-hub of Tangshan and nationwide inspections planned on capacity cuts. At the same time, a global steel boom has been helping drive iron ore inventories lower and pushing prices higher.

“As China’s steel production still continues to expand, its steel margins remain elevated and seaborne iron ore supply remains constrained, we think that the iron ore price can stay around the current level through 2Q, but is likely to remain highly volatile,” according to a note by analysts at Morgan Stanley.

Wild Ride

Iron ore futures in Singapore rose 2% to $205.70 a ton by 3:15 p.m. local time, after tumbling about 11% over the previous two trading days. Contracts in Dalian closed 2.1% higher after dropping the daily limit on Friday. Rebar futures dipped 0.8% in Shanghai and hot-rolled coil fell 3%.

Iron ore rocketed higher in the early part of last week, prompting the authorities to crackdown further on the steel sector. Steel mills from Tangshan to Shanghai were warned not to fabricate or spread price hike information after Premier Li Keqiang urged the nation to deal with surging prices.

The bourse in Dalian has raised trading limits for iron ore, while the Shanghai Futures Exchange plans to raise trading limits of deformed steel bar and hot-rolled sheet futures from Tuesday.

The government may intervene but they were caught in between their policy of urbanization -- which needs steel or ore and keeping consumption up -- and their wish to control pollution and the iron ore price, said Philip Kirchlechner, director at Iron Ore Research Pty.

“The complicating factor with the iron ore price is that we do not know what the speculative component of the price is,” he said. “If the speculative component is big enough, any rumor about changes in government policy can push the price down again. This is what might be happening.”

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