December 8, 2016 / 3:23 AM / 7 months ago

China steel, iron ore extends gains to 6th day amid capacity cuts

3 Min Read

* China also clamping down on low-quality steel producers

* Dalian iron ore rises to strongest since January 2014

* Spot iron ore hits over two-year high on Wednesday

By Manolo Serapio Jr

MANILA, Dec 8 (Reuters) - Chinese steel and iron ore futures rose for a sixth session in a row on Thursday, spurred by worries over tighter supply with Beijing intensifying efforts to cut excess steel capacity.

Along with continued inspections of steel mills in a fight against pollution, China is investigating illegal expansion by steel companies and has vowed to severely punish them.

The most-traded rebar on the Shanghai Futures Exchange was up 0.5 percent at 3,354 yuan ($488) a tonne by 0310 GMT.

The construction steel product touched a 31-month high of 3,428 yuan on Wednesday, anchored on signs of a strengthening economy and concerns over tighter supply amid Beijing's supply-side reform drive.

Also being targeted by China's push to address the glut are producers of low-quality rebar which together have a combined capacity of 100-125 million tonnes, Morgan Stanley said in a note, citing Chinese agencies Mysteel and Xiben Newline.

Output from these producers don't appear to be included in China's official data "so the removal of this capacity could have a material impact on supply and pricing," Morgan Stanley said.

"We see this as positive for large producers that can benefit from market share increase."

On the Dalian Commodity Exchange, the price of raw material iron ore was up 1 percent to 634.50 yuan a tonne, after hitting 653.50 yuan earlier, its highest since January 2014.

"Stronger steel prices tend to lead iron ore prices higher as incentives to expand output increase. But that really only works when the lift in steel prices is demand-led," Commonwealth Bank of Australia analyst Vivek Dhar said in a note.

"With the lift in steel prices linked more with future supply cuts, the more prevalent risk is that iron ore demand will fall. This risk should eventually drive iron ore prices lower."

Still, the rally in futures pushed spot iron ore back above $80 a tonne on Wednesday as physical cargoes, mainly from top suppliers Australia and Brazil, were sold higher this week.

Iron ore for delivery to China's Qingdao port .IO62-CNO=MB climbed 3.2 percent to $82.25 a tonne, its strongest since October 2014, according to Metal Bulletin.

$1 = 6.8789 Chinese yuan Reporting by Manolo Serapio Jr.; Editing by Richard Pullin

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