Slide in China steel snuffs iron ore rally, revives glut worries
By Manolo Serapio Jr and Ruby Lian
SINGAPORE/SHANGHAI, June 19 (Reuters) - A slump in Chinese demand for steel has poured cold water on a rally in iron ore this month, with prices for the raw material likely to drop over the rest of the year, traders and analysts said.
Iron ore surged 40 percent from a decade-low in just over two months as dwindling stocks at China's ports suggested tighter supply in a market that had been hit hard by plentiful ore.
But China's appetite for steel has been shrinking as its economy slows and is now taking a further hit as construction eases over the summer, forcing mills to cut production. January-May output fell nearly 2 percent from the year before as consumption dropped 5 percent, based on government and industry data.
Prices will also be pressured by indications that iron ore shipments are starting to pick up again, after speculation that some miners and traders had been holding back supply to bolster prices.
"We believe current iron ore prices are too high and the rally should turn out to be self-defeating as necessary supply cuts are unlikely to happen, keeping the market in surplus," said Carsten Menke, analyst at Julius Baer in Zurich.
After hitting a near five-month high of $65.40 a tonne .IO62-CNI=SI in early June, iron ore lost 6 percent this week after Shanghai rebar steel futures slid to the lowest since their 2009 launch.
Shanghai rebar prices have lost 17 percent so far this year.
Menke said iron ore could fall below $40 per tonne in a worst case scenario if China's construction sector weakens and the overall economy slows further. Continuación...