Iron ore futures in China rallied to their highest in nearly six weeks on Tuesday, extending recent gains along with steel prices, although steel production curbs over winter suggest further price increases in the raw material may be limited.
Chinese cities have ordered their steel mills to cut output from this month through March as part of Beijing's campaign to fight smog. Some cities, including top steelmaker Tangshan, have already enforced cuts since October.
That has helped tighten steel supply in China, the world's biggest producer, pushing up prices of the building material. The utilisation rate at blast furnaces across China's mills fell to 70.99% last week, the lowest since at least 2012, data from Mysteel consultancy showed.
The most-active rebar on the Shanghai Futures Exchange closed up 0.8% at 3 753 yuan ($567) a tonne, after touching a two-week peak of 3 794 yuan.
Iron ore on the Dalian Commodity Exchange jumped as far as 475 yuan per tonne, its loftiest since Sept. 28. It closed 3.2% higher at 469 yuan. Coke climbed 3.7% to 1 831 yuan a tonne and coking coal gained 2.6% to 1 185 yuan.
"Worsening weather conditions in northern China have resulted in more cities implementing steel mill closures," ANZ analysts said in a note.
"With steel output likely to fall, traders are now worried about the strain on already low inventories around the country."
But a Shanghai-based iron ore trader believes the price gains in iron ore and other steelmaking ingredients may not be sustained as more mills curb output as winter approaches.
"My colleague just went around Tangshan last week and while some production cuts haven't happened yet, the mills already have plans to reduce output individually," the trader said.
Still, stronger futures have lifted spot iron ore prices.
Iron ore for delivery to China's Qingdao port soared 5.8% to $63.36 a tonne on Monday, its strongest level since Sept. 27, according to Metal Bulletin.
That marked the largest single-day spike since July 31 for the spot benchmark, which has already risen more than 8% from a four-month trough reached last week.
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