Chinese iron ore futures jumped more than 5 percent on Friday, getting a boost from a rally in steel prices on expectations of more production cuts in the world’s biggest steel producer as China intensifies its smog war over winter.
However, traders doubt whether the strength in prices of steelmaking raw materials – iron ore and coking coal – would last, with demand expected to be dented as steel output is curbed.
Mills in some northern Chinese cities, including top steel-producing Tangshan, were ordered to cut output this month or a month ahead of schedule, acting on government policy to fight smog caused by pollution from industrial plants.
“Market participants felt that authorities could impose stricter restrictions on sintering and even steel output in China in coming days as smog conditions deteriorate in northern China,” Commonwealth Bank of Australia analyst Vivek Dhar said in a note.
The most-active iron ore contract for January delivery on the Dalian Commodity Exchange closed 5.4 percent higher at 469 yuan ($71) a tonne, after sliding 3.4 percent on Thursday.
Other steelmaking ingredients coking coal and coke also advanced after both dived more than 6 percent in the previous session. Coking coal climbed 2.9 percent to 1,152.50 yuan a tonne and coke rose 2.5 percent to 1,762.50 yuan.
The most-traded January rebar contract on the Shanghai Futures Exchange rose 4.3 percent to 3,776 yuan per tonne.
Mills in Tangshan were ordered to cut sintering output by half from Oct. 12. Sintering is a process where iron ore is heated into a mass as a prelude to steelmaking and which causes heavy pollution.
China’s steel output dropped 3.7 percent in September from a record high the previous month as mills reduced production in line with Beijing’s campaign, and analysts predict further declines as winter curbs set in.
“On the longer term, iron ore prices will remain weak because the production controls will end in March next year,” said an iron ore trader in Beijing.
The recovery in Chinese iron ore futures could spur a similar rebound in spot iron ore which touched a one-week low on Thursday.
Iron ore for delivery to China’s Qingdao port .IO62-CNO=MB fell 2.9 percent to $60.88 a tonne on Thursday, according to Metal Bulletin, marking its biggest single-day drop in nearly a month.
The spot benchmark has lost 2.6 percent so far this week, after being largely steady in the past two weeks.