Spot iron ore prices rose on Friday as a firmer outlook for China''s steel demand prompted mills to restock the raw material, with Shanghai steel futures edging up to three-week highs.
China''s daily crude steel output hit a record high above 2 million tonnes towards the end of June, buoyed by increased construction of social housing units in the country.
"It''s very difficult to see Chinese steel mills cutting production because local demand for long steel products is driven by local government investment and real estate remains strong," said Henry Liu, regional head of commodity research at Mirae Asset Securities in Hong Kong.
The key October rebar contract on the Shanghai Futures Exchange hit a session peak of 4,828 yuan per tonne, its highest since June 13, before closing steady at 4,808 yuan.
Shanghai rebar rose 1.7 percent for the week, its best weekly gain since early April.
Higher steel prices usually prod traders and steel mills to buy more iron ore, the key steelmaking material.
Offers for iron ore in the spot market rose $2 on Friday from Thursday, with Australian 62-grade Newman fines quoted at $176-$178 a tonne, with freight, Chinese consultancy Umetal said.
Ore with 63.6/63 iron content from India was quoted at $179-$181 a tonne.
"I think most of the buyers in the market are traders who are taking positions on expectations that prices will continue rising," said a shipping manager for an iron ore trading firm in Shanghai.
"But many of the steel mills still prefer to buy port stocks which are $3-$4 per tonne cheaper than spot prices." The price of iron ore with 62 percent iron content rose 1.2 percent to $170.70 a tonne on Thursday, the highest since June 23, according to The Steel Index .A similar index by Platts IODBZ00-PLT was flat at $174 and that of Metal Bulletin was little changed at $169.76.
Traders said a brief suspension by BHP Billiton of iron ore shipments from Australia''s Port Hedland also supported prices. BHP, the world''s No. 3 iron ore miner, said it would resume operations on Friday, a day after suspending rail and port movements when a worker was killed in a crane accident
SHORT-LIVED Despite China''s record steel production pace, demand could gradually ease during the normal summer lull when product inventories are likely to rise, said Liu at Mirae Asset.
At the same time, he doubts whether there will be a big push on steel prices from China''s social housing projects, estimating that the government''s target of building 10 million houses this year should only require 20 million tonnes of steel, equivalent to just 10 days of domestic steel output.
"I don''t expect the social housing project to boost demand as huge as some analysts believe and this round of iron ore restocking is likely to be short-lived," a Shanghai-based iron ore trader said. "Since we are not expecting a big hike in steel demand in the summer, we are selling our materials at a loss as we just don''t want to build up too much inventory," he said.
Reflecting expectations spot iron ore prices may not be able to build on recent gains, nearby forward swapsslipped on Thursday.
The Singapore Exchange-cleared July and August contracts both dropped by more than a dollar to $169.75 and $167.83 a tonne, respectively. The September contract slipped 87 cents to $167.25.