January 29, 2013 / 6:42 AM / 5 years ago

Snapshot of Chinese steel centre stirs recovery hopes

WUXI, China, Jan 29 (Reuters) - In one of China's biggest steel trading centres, there are signs of a pick up of activity, at a time when investors in commodity markets are trying to weigh up whether a recovery in Chinese demand can be sustained this year.

During a recent visit, lines of trucks were awaiting to unload material into vast warehouses spanning an area of seven football pitches, the steel potentially destined to be used to build anything from new apartments to rail lines.

Evidence of a rebound in steel demand in the world's biggest consumer has helped drive up iron ore with the price of the steel-making raw material climbing by nearly a third since December, although there have been recent wobbles.

Iron ore hit a 15-month top of $158.50 a tonne on Jan. 8 in a swift rally that quickened last month as Chinese mills rebuilt stockpiles. The price then fell more than 8 percent before regaining some ground last week.

In a major steel warehousing zone in Wuxi, 120 km (75 miles) northwest of Shanghai, store managers and traders noted restocking taking place.

At the Shangzhuanxian warehouse, which has a storage area of 38,000 sq metres (410,000 sq feet), cranes were loading and unloading steel stocks, with trucks waiting their turn.

"Business is good these days. We can see about 2,000 tonnes of steel products coming in everyday as traders are building up stocks ahead of the holiday. Stocks of similar volume flow out to end users too," said an official at the warehouse, adding that restocking volumes had hovered at just a few hundred tonnes several weeks before.

Steel traders typically re-stock ahead of the Lunar New Year holiday in mid-February as manufacturing and construction activities tend to pick up after the holiday.

"Stockpiles have risen several thousand tonnes over the past two months as traders' sentiment has improved and they are prepared to rebuild stocks. Unlike in September and October 2012, when traders were desperate to de-stock," said the warehouse official.

Stronger orders from traders and end-users have helped steel product inventories at large Chinese steel mills drop 17 percent since September to near an 11-month low of 10 million tonnes in early January, data from China Iron and Steel Association showed.

Helped by a rebound in demand from railway and other infrastructure projects, analysts said mills would be able to reap better margins as domestic steel prices rise -- in turn spurring them to raise output and consume more ore.

The rush to restock, along with slow production increases at home and abroad, will likely keep iron ore prices supported in the first half, before new mine supplies tip the market into a surplus later this year.

Benchmark iron ore prices are forecast to average $125 a tonne this year, according to a Reuters poll of 17 analysts. That is slightly lower than the 2012 average of $128, as analysts see prices peaking in January.

BETTER PROFIT MARGINS

Some analysts expect low inventory levels will spark a stronger-than-expected rise in steel prices.

Spot prices of hot-rolled coil, used in manufacturing, have risen about 20 percent since early September. The price of rebar, mainly used in construction, climbed only 6 percent since early September, according to Xiben New Line Co Ltd, a spot steel trading platform in Shanghai.

"The market should brace for a round of steel price gains after the Lunar New Year as end users rebuild inventories," said a trader in Wuxi, who sells steel from a big state-owned mill.

Annualised steel output from China is expected to rise 5.7 percent from now to reach 740 million tonnes by mid-February, Macquarie said in a note, adding that gains will accelerate in the second quarter as construction activity peaks.

At another smaller warehouse in Wuxi, re-stocking was also expected soon after a trader said inventories of medium plates, commonly used in shipbuilding, had fallen from a high of over 30,000 tonnes in July to around 8,000 tonnes.

"Most traders have missed the opportunity to re-stock before prices jumped past few months, so overall inventories are at relatively low levels and once end users restock after the new year prices will spike," said Du Hui, an analyst with Qilu Securities in Shanghai.

$1 = 6.2136 Chinese yuan Editing by Ed Davies

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