Spot iron ore prices extended their recovery on Friday, inching towards $180 per tonne as Chinese buyers continued to replenish their stocks, but traders were still bracing for another slump.
A commodities broker based in Hong Kong said most in the market still believed current prices were unsustainable, even after the pick-up in trade this week.
"We may have seen a jump this week but generally people are in the market for one or two shipments and that's it -- they will buy what they need, but stockpiles are still pretty high," he said.
Industry consultancy Mysteel's 63.5-63 percent index for Indian fines on the Chinese market reached $179 per tonne on Friday, up $2 on the day and $8 since last week.
Platts 62 percent iron ore index IODBZ00-PLT ended Thursday unchanged at $175 a tonne after jumping $5.50 on Wednesday.
Metal Bulletin's 62 percent gauge .IO62-CNO=MB reached $172.87, up $3.16, while the Steel Index .IO62-CNI=SI saw a $1.90 increase to $172.40.
The broker said the relatively large increases might have resulted from a decision by Rio Tinto and BHP Billiton to auction off a number of cargoes this week.
"They have each got a dozen customers, and they hold internal auctions of cargoes -- these didn't previously go into the index but now they do, and they might have a substantial impact," he said.
There remain ongoing concerns about supply, with the industry still waiting for an April 4 hearing by India's supreme court on the legality of a supply ban from the country's biggest iron ore producing state, Karnataka. [ID:nL3E7DB0VD]
"If we see a loosening up from Karnataka and a bit more supply coming onto the market, the monsoon season notwithstanding, that could reduce the tightness and prices should soften a bit more," said Sebastian Lewis, head of Asia research and consulting with Steel Business Briefing in Shanghai.
STEEL STILL WEAK
Three Chinese traders contacted by Reuters on Friday said the consensus in the market was that prices will fall to around $160-165 in the coming month.
"Steel output is still very high, but if that situation continues it will just cause more problems for the market," said a Beijing-based iron and steel dealer.
The China Iron and Steel Association said this week that Chinese steel output reached a record of 1.94 million tonnes a day in the middle of March, with producers continuing to defy market signals.
Lewis said Chinese mills might actually be massaging their figures after misreporting output volumes in 2010 in order to evade tough energy consumption restrictions.
"They under-reported in order to show they were using less energy, but you can't just lose the figures, and so they just put them into this year," he said.
"Certainly the big (steel) production run in the first few months of the year was probably just misreporting from last year and isn't as strong as people have been saying."
This week's revival in Chinese steel prices appears to have already fizzled out. Mysteel said rebar prices in Shanghai stood at 4,550-4,560 yuan ($696) per tonne on Friday, up 30 yuan from last week but 10 yuan down from Thursday.
The most active rebar contract on the Shanghai Futures Exchange entered the midday break on Friday at 4,768 yuan per tonne, down 25 yuan from Thursday.
As the second quarter begins, the rationale behind the three-month pricing system used by the big iron ore suppliers could be further undermined, the broker suggested.
According to the new rules, April-June prices will be based on an average of index prices from December to February. Despite a slump in spot iron and steel prices in March, mills are now facing record-high contract iron ore costs.
Reuters calculations suggest that three-month contract prices could rise 20 percent to almost $180 per tonne beginning on April 1.
"The buyer has a choice and he could say that he doesn't want the benchmark but wants the spot price instead -- and that could force (the spot price) up," said the broker.
Lewis said some steel mills could defer shipments in the second quarter and make up the difference from the spot market.
"But it's not the big players who will do this, but the mid-sized players who are producing lower quality steel and can afford not to be so stringent about the quality of the iron ore they use," he said. ($1 = 6.549 yuan)