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China steel futures extend rally as raw material costs spike
October 17, 2016 / 4:11 AM / a year ago

China steel futures extend rally as raw material costs spike

* Steel, iron ore futures jump over 2 pct

* Surging raw materials eat into mills’ profitability

* Coking coal up 5.3 pct, coke up 3.5 pct

SHANGHAI, Oct 17 (Reuters) - Chinese steel futures extended gains to hit a nearly six-week high on Monday, lifted by surging raw material costs in the world’s top steel producer.

A big rally in steelmaking raw materials including coking coal and coke this year has sharply increased Chinese steelmakers’ production costs and eroded mills’ margins, forcing a growing number of steelmakers to start booking losses.

“Only about half of Chinese steel mills are still profitable, and some are making a loss of 100 yuan ($15.00) a tonne,” said Li Wenjing, an analyst with Industrial Futures in Shanghai.

“The shortage of coal and coke supply has led to a big spike in prices, and turned mills’ performance to negative and thus caused them to curb production,” Li added.

The most active rebar futures on the Shanghai Futures Exchange had risen 2.3 percent to 2,433 yuan a tonne by the midday break. They earlier touched a high of 2,448 yuan a tonne, their strongest since Sept. 6.

Iron ore futures on the Dalian Commodity Exchange had risen 2.4 percent to 442.5 yuan by the midday break.

An environmental crackdown in China to battle pollution and overcapacity has also hit steel mills’ production, though they could increase output to offset losses when orders pick up.

China’s Hebei province, the country’s biggest steelmaking region, has imposed what it calls “special emission restrictions” on local mills as part of its war on smog, according to a policy document.

RAW MATERIALS SPIKE

Though China has ordered major coal mines to raise output as the government looks to boost supply after shutdowns, steel mills have still found it difficult to restock coking coal and coke, traders said.

Li expected the supply shortage of coking coal and coke to last until next spring as cold weather will hit coal mines in northern regions.

“Given supply of raw materials will remain tight, as long as demand does not shrink sharply, the overall situation will not improve,” Li added.

Coking coal futures on the Dalian Commodity Exchange had surged 5.3 percent by midday on Monday. They have more than doubled so far this year.

Coke futures had climbed 3.5 percent by midday, and have soared 140 percent this year. Iron ore surged 88 percent in 2016.

By sharp contrast, steel rebar futures have gained only 44 percent since the beginning of the year.

Iron ore for delivery to China’s Tianjin port .IO62-CNI=SI rose 0.3 percent to $56.80 a tonne on Friday, its largest gain since Sept. 9, according to data from The Steel Index. The spot benchmark was up 4.4 percent for the week. ($1 = 6.6685 Chinese yuan renminbi) (Reporting by Ruby Lian and Josephine Mason; Editing by Joseph Radford)

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