Iron Ore Extends Rebound On China Steel Bets

China's iron ore futures climbed the most since the trading started in 2013 as rebar stockpiles continued to shrink, signaling the surge in steel production to a record may have further to run to satisfy demand.

Futures advanced 5.6 percent to 367 RMB ($US55.91) a tonne on the Dalian Commodity Exchange. While, in Singapore, the SGX Asia Clear contract for September gained 5.3 percent to $US44.70 a ton. China suppliers mass-produced a record amount of steel on a daily basis in April as they responded to a spurt in prices that rescued margins. Figures for May are due on Sunday. The industry remains wracked by chronic oversupply and is reliant on exports to clear its surplus. "Steel inventories continue to decline, showing that the surge in output has not been enough so far to replenish inventories," Xu Ke, an analyst at Huatai Futures in Shanghai, said by phone. "Fundamentally, China's steel industry remains oversupplied. It's a matter of time before a sell-off starts again."

The gains in Asia preceded Monday's 2.1 percent increase in Metal Bulletin's benchmark price. Ore with 62 percent content rose to $US51.11 a tonne after jumping 3.9 percent Friday. That's still well shy of April's high of $US70.46 a ton after prices collapsed due to a regulatory crackdown on speculators and an increase in supply.

In China, inventories of reinforcement bar, which makes half the world's steel, have shrunk 11 of the past 13 weeks, and were at 4 million tons in the period to June 3, according to Shanghai Steelhome Information Technology Co. Iron ore port reserves also moderated, falling 0.4 per cent to 100.25 million tons.

Demand for iron ore may decline as steel prices abate, according to Axiom Capital Management. Rebar prices in Shanghai sank 23 percent in May. Output in China will shrink at an accelerated pace as small mills idle production again, New York-based analyst Gordon Johnson said in a note Monday.

The purchasing managers' index for China's steel industry in May showed a drop in the production gauge. The overall reading was 50.9 from 57.3 in April, with 50 the dividing line between expansion and contraction.

"June usually marks the start of a seasonal lull for steel demand," Maike Futures said in a report Monday. The retracement in steel prices will squeeze mills' margins, hurting demand for iron ore, they wrote.