Shanghai steel rebar futures rose to a record on Wednesday after Chinese traders returned from a week-long Lunar New Year holiday anticipating a pickup in demand.
The price rise comes on the heels of increasing cost of raw materials iron ore and coal and ahead of an expected recovery in steel demand in top consumer China despite raising interest rates on Tuesday for the second time in six weeks.
"We're in the time of year when traders build steel inventory, so while real demand is weak at the moment, traders are restocking through it expecting stronger demand in the following month," said Graeme Train, analyst at Macquarie in Shanghai.
"I wouldn't be surprised if steel prices continue rising. Chinese production is still below the run-rate that even more conservative forecasters are predicting for this year and as a result they're probably still underproducing steel so you'll need to incentivise that production by having prices rise."
Crude steel output by China, the world's biggest producer, is forecast to rise 6 percent this year from a record 627 million tonnes in 2010, according to a Reuters poll of analysts in December. The projected growth rate, however, is slower than the 9.3 percent pace in 2010.
The most active reinforcing bar, or rebar, contract for October delivery on the Shanghai Futures Exchange, was up 0.2 percent at 5,136 yuan a tonne by 0302 GMT, after touching an all-time high of 5,150 yuan earlier.
China's latest quarter percentage point rate hike is unlikely to adversely hurt steel demand, analysts say.
"China's aim is to slow growth and not slow demand in absolute terms. I think everybody has been factoring in slower growth rate this year than last year and some policy is needed to ensure that that happens, so I don't think anyone should be surprised by this rate hike," said Macquarie's Train.
Continued restocking by Chinese steelmakers should translate to more iron ore purchases which could drive spot prices of the raw material even higher.
Key price indexes, which global miners use in calculating quarterly contract rates, stayed near recent highs on Tuesday.
Platts' 62 percent iron ore index IODBZ00-PLT was flat at 187.25 a tonne, cost and freight delivered to China, a record level reached last week.
The Steel Index (TSI) 62 percent iron ore benchmark .IO62-CNI=SI ticked up 10 cents to $185.70 and Metal Bulletin's 62 percent gauge .IO62-CNO=MB was unchanged at $183.36. (Reporting by Manolo Serapio Jr.; Editing by Manash Goswami)