Shanghai steel futures rose to a record for a fifth day in a row on Friday as index-based spot iron ore prices bolted to all-time highs on tight supplies and strong demand from top buyer China.
Chinese steelmakers are boosting production in anticipation of a pickup in demand when construction activities restart in spring after halting in winter.
"People are pushing up prices because the cost of iron ore and coal are increasing and spring is approaching which means the resumption of construction activities in China," said an iron ore trader in China's eastern Shandong province.
The most active reinforcing bar, or rebar, contract for October delivery on the Shanghai Futures Exchange closed up 0.4 percent at 5,167 yuan per tonne, after peaking at 5,230 yuan earlier.
Most Chinese rebar exporters have stopped selling overseas and have turned to the domestic market given soaring prices at home, traders said.
Spot rebar is being sold at 4,800 yuan per tonne in northern China and at almost 5,000 yuan in the south, the Shandong trader said.
"Most steel mills are producing in full capacity which means there could be a big surplus of these steel products if demand is weak," he added.
RECORD IRON ORE
The surge in Shanghai rebar futures followed iron ore price indexes reaching record levels on Thursday.
Global miners Vale and Rio Tinto use the indexes in setting quarterly iron ore contracts, which is likely to hit a record in April-June given the recent surge in spot prices.
Vale and Rio price quarterly rates using the average index-based price for the past three months one month before the start of the relevant quarter.
Platts' 62 percent iron ore index IODBZ00-PLT has averaged $176.5 a tonne, cost and freight delivered to China, from Dec. 1 until this week, up more than 18 percent from the September-November average.
Platts' index rose $1.50 to $190.25 a tonne on Thursday, and with the bull trend intact, it could test $219 over the next three months, said Reuters market analyst Wang Tao.
The Steel Index 62 percent iron ore benchmark .IO62-CNI=SI climbed $1.60 to $188, and Metal Bulletin's 62 percent gauge .IO62-CNO=MB jumped $1.79 to $185.90.
BHP, Rio Tinto, Vale as well as Australian iron ore producer Fortescue Metals Group "are shipping as much as they can" while cargoes from No. 3 supplier India are crimped by an export ban in Karnataka and transport restrictions in Orissa, Commonwealth Bank of Australia said in a note.
India's Supreme Court has moved a hearing on the Karnataka ban to April 4 from mid-February, which could help extend the current rally in iron ore prices.
"I don't think it's going to cause anybody to be more bullish than they already are but it's going to reassure them that their present confidence is justified," said Rory MacDonald, head of iron ore operations at Steel Index.
The Karnataka ban has been in place since last July, shrinking India's iron ore exports for a sixth straight month in December.
Indian ore with 63.5 percent iron content was being offered in China at $190-$192 a tonne, including freight, up from $188-$190 earlier this week, said Chinese consultancy Umetal.
That grade could hit $200 next week, said a Shanghai-based trader who saw offers of as high as $197 per tonne.
"But we may see some correction in March. Some mills are not buying because credit is getting tighter and the government is bent on controlling price increases," the Shanghai trader said.
China raised interest rates for the second time in six weeks on Tuesday to tame stubbornly high inflation that threatens to unsettle global markets