ANALYSIS-China iron ore binge raises some hope, many eyebrows

* China's April iron ore imports 3rd straight record high

* Jump in freight values also underpins hopes for commods

* But other evidence not supporting bullish view

By Miyoung Kim

SEOUL, May 7 (Reuters) - A third month of record Chinese iron ore imports seems to add to evidence from a rising manufacturing index, rebounding steel prices and a spike in freight rates that China is back as the main driver for a commodities rally.

Trouble is, many analysts don't believe it will last, even as more of Beijing's nearly $600 billion stimulus plan takes effect.

The continued decline in power consumption, high iron ore inventory levels and weak overseas steel demand suggest that trade statistics and freight rates may be as misleading now as they were three months ago, when the financial world last looked at the steel industry as the canary in China's industrial mine.

"We find this trend (of rising iron ore imports) is perplexing given Chinese steel exports fell 60 percent in March," Deutsche Bank analysts said on Thursday.

"Similarly the domestic market does not show any sign of a turnaround... and China may have an oversupply of more than 100 million tonnes of crude steel this year."

Hope that the "green shoots" of recovery are showing in the world's fastest-growing commodity consumer saw dry bulk freight rates .BADI jump 8.9 percent, the most since Feb. 9 and bringing the rise to 40 percent in the past month.

But many analyst cautioned against reading too much hope into the data, as some did three months ago when early signs of increased steel industry activity proved fleeting.

Far from reflecting rising demand, they say the surge of iron ore imports could be the result of cost-competitive global miners taking market share from high-cost Chinese miners.

But this trend could lead to its own undoing as rising freight costs make imports less attractive, while record ore stocks sitting at Chinese ports suggest traders' rush to restock hasn't been matched by robust growth in steel output.

"The question now is how sustainable this is. We expect the displacement of domestic ores to decelerate, given that seaborne suppliers will be less keen to lower prices further," Credit Suisse analyst Roger Downey said.

For a graphics on China's iron ore imports, click: here

China's iron ore inventory at ports jumped to a record 74.7 million tonnes in April, and on top of that, research firm World Steel Dynamics estimates there is a further 20 million tonnes of iron ore stocks at steel mills. [ID:nSHA205195]

Deutsche Bank estimates the portion of iron ore stocks held by traders and intermediaries, as opposed to end consumers, at around 50 percent.

"Some single steel mills in Tangshan that I have visited have between 700,000 and 800,000 tonnes in inventories. Half of this level would be reasonable," Zhang Changan, senior business consultant at World Steel Dynamics, said at a conference last week.

The iron ore buying spree could also taper off given prospects of lower steel output and consumption in the world's biggest producer.

The World Steel Association expects Chinese apparent demand to drop 5 percent this year, while many analysts also expect production from China will drop, or at best remain flat.

Overseas demand for steel may fall by 15 percent to mark the steepest decline since World War Two, the group predicts.

MORE SPOT

Domestic iron ore output doesn't look like much of a threat to imports unless there are further steep rises in freight costs as well as spot iron ore prices, which may take longer than expected as major miners flood Chinese markets with record sales in the absence of strong demand elsewhere.

BHP (BHP.AX) (BLT.L) nearly trebled its iron ore sales under cheaper spot prices in the last three quarters, mainly to China, while Vale VALE4.SA (VALE.N) reported on Wednesday revenue from China jumped more than $1 billion in the first quarter, despite lower spot prices, as it attracted more customers there.

"Except for China, demand for iron ore remains extremely weak, with Japan, the second-biggest importer, reducing its purchases by 34.4 percent (from a year ago)," Vale said, as it reported quarterly profits down by one third. [ID:nN06271657]

Earlier this month, Goldman Sachs JBWere raised its forecasts for Chinese iron ore imports to 486 million tonnes, a net increase of 42 million tonnes, to reflect improving prospects of Chinese steel consumption and less competitive domestic ores.

But Chinese ore imports are already running ahead of this figure on an annualised basis.

"The rebound in iron ore sales is not a sign of recovery in global metals demand, nor is it a sign of recovery of metals demand in China," Bradesco analysts said in a note this week. (Additional reporting by Alfred Cang in Shanghai; Editing by Michael Urquhart)