Iron ore forward swaps rose on hopes prices will recover after falling below $140 a tonne this month on increased Chinese demand in the fourth quarter. There is talk that China may be easing electricity supply curbs to several steel mills that were either shut or ordered to slash output earlier, sending the Shanghai rebar futures sliding on Monday on the prospect of increased supplies,
traders said.
"The steel production capacity has recovered from zero to 60 percent or 70 percent in some regions because the restriction on electricity use has been lifted to some extent,"
said an iron ore trader in Hangzhou in southern China. Among the areas where the restrictions have been lifted or eased include Handan in the steelmaking base of Hebei province, he said, adding he has spoken to some officials at the mills. "Some of the mills have already started running their blast furnaces that were shut down," he said.
China earlier this month ordered about 18 steel mills in Hebei to shut down operations for up to one month and ordered another 30 in the capital Tangshan to slash output by up to 70 percent from September as the country races to meet a five-year
energy efficiency target that ends this year. [ID:nTOE686028] The prospect of increased steel supplies dragged down Shanghai rebar futures by 1.4 percent on Monday, with the most active January contract SRBc4 falling as low as 4,255 yuan a
tonne, its weakest in nearly a month, before closing at 4,258 yuan. Rebar futures touched five-month highs earlier this month on news of the mill closures.
STOCKPILING
Lower contract prices in the October to December period should encourage steel mills in China, the world's biggest iron ore buyer and steel producer, to consider stockpiling.
"I think we're going to see a decent pickup in iron ore demand in Q4 for inventory building heading into Q1," said Michael Gaylard, director of strategy at Freight Investor
Services in Shanghai. "We're going to have a fairly relatively low quarterly
index price for Q4 and I expect people to max out on their contract tonnage at that level."
Iron ore miners Vale and Rio Tinto were slated to cut contract prices for clients by up to 13 percent for the fourth quarter due to weaker spot prices in the past three months. That would mark the first drop in contract prices since the major producers switched in April to a flexible quarterly pricing system from a decades-old annual scheme. Gaylard said Chinese stockpiling to take advantage of the price cut should help iron ore spot prices rebound to the $150 and $160 a tonne levels. "Coming into Q4, we'll see quite a bit of volatility in the ore market and that should play through on to the swap side and
give that more impetus as well," he said.
The October swap contract SGXIOc2, settled against The Steel Index benchmark and cleared by the Singapore Exchange, climbed $1.37 to $134.37 a tonne at the end of trade on Friday.
The November SGXIOc3 and December SGXIOc4 contracts also rose. Despite gains in swaps, spot prices were steady, with China just back in the market on Monday after a three-day break last week.
The Steel Index 62 percent iron ore benchmark .IO62-CNI=SI stood at $139.50 a tonne, including freight on a landed China basis, for a third straight day on Friday.
Physical market activity may pick up this week although trades could remain slow with China off again on Oct. 1 to 7 for the National Day holiday.
Iron ore prices had slid 6 percent since hitting a three-month high above $148 a tonne in mid-August due to a hazy demand outlook after China curbed steel production.