China iron ore retreats amid worries over steel margins

MANILA (Reuters) - Iron ore futures in China shook off early gains to end lower on Wednesday, reflecting worries over slipping steel margins this year amid leaner demand in the world’s top consumer.

FILE PHOTO - Trucks drive inside an iron ore dump site at the Huanggang Terminal of Qingdao Port, in Qingdao, Shandong Province, China June 7, 2014. REUTERS/Fayen Wong/File Photo

A seasonal pickup in China’s construction activity that usually occurs in April and May has been off to a slow start, traders said.

“A likely destocking in iron ore and falling steel margins may weigh on iron ore prices in the short term,” ANZ strategists Daniel Hynes and Soni Kumari said in a report.

The most-traded September iron ore on the Dalian Commodity Exchange closed down 0.7 percent at 447.50 yuan ($71) a tonne, after rising more than 2 percent intraday to a one-week high of 461 yuan.

The most-active October rebar on the Shanghai Futures Exchange slipped 0.7 percent to 3,395 yuan a tonne.

Steel margins in China have dropped 10 percent year to date and down 39 percent from their peak above 1,000 yuan per tonne in late December, ANZ said.

While weaker margins had spurred appetite among Chinese mills for cheaper, lower grade iron ore, ANZ said Beijing’s environmental campaign should still support demand for higher grade ore.

While seasonal steel demand should underpin raw material prices, “there will be more short-term volatility” in spot rates amid swings in futures, said a Shanghai-based trader.

Iron ore, along with other commodity futures and risky assets, got a boost on Tuesday after Chinese President Xi Jinping promised to open China’s economy further and lower import tariffs, helping calm worries over trade tensions between China and the United States.

Firmer futures in the prior session had inspired a similar recovery in spot iron ore prices, pushing up bids in the physical market, traders said.

Iron ore for delivery to China’s Qingdao port jumped 2.1 percent to $65.30 a tonne on Tuesday, also the strongest level in a week, according to Metal Bulletin. It was the biggest daily percentage spike for the spot benchmark since March 29.

($1 = 6.2787 Chinese yuan)

Reporting by Manolo Serapio Jr.; Editing by Sunil Nair and Amrutha Gayathri