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Iron ore extends pullback after rally on China demand hopes

* Dalian iron ore set for sixth weekly gain in seven

* China steel mills cautious as iron ore prices soar

* Iron ore rally seen losing steam on rising supply

MANILA, Aug 21 (Reuters) - Iron ore futures eased on Friday, extending a pullback after a sizzling rally driven by optimism over prospects of steel demand in China, but Dalian prices were poised for their sixth weekly gain in seven.

Iron ore for January 2021 delivery on China’s Dalian Commodity Exchange ended the morning session down 0.7% at 846.50 yuan ($122.58) a tonne, but was on track for a weekly gain of 1.8%.

The steelmaking ingredient’s September contract on the Singapore Exchange slipped 0.4% to $123.29 a tonne.

Iron ore prices scaled multi-year peaks this week as mills and traders ramped up purchases, expecting China’s economic stimulus to keep demand strong, particularly for construction material rebar.

Supply constraints also supported prices, with the coronavirus outbreak in key producer Brazil hampering miners’ operations.

Chinese traders remained bullish on Thursday, offering firmer prices and unwilling to sacrifice much of their margins, prompting mills to adopt a wait-and-see stance, Mysteel consultancy reported.

Some analysts expect a V-shaped economic recovery for China, the world’s top metals producer and consumer, after the pandemic shock.

“(But) a lack of recovery in retail and private investment will continue to put the focus on stimulus to drive growth, which should benefit Australia’s commodity exports,” including iron ore, said Tapas Strickland, an economist at National Australia Bank.

FUNDAMENTALS

* Iron ore prices may extend their steep gains in the coming weeks, but rising supplies are set to eventually undermine the rally, analysts said.

* Benchmark 62% iron ore's spot price stood at $126.50 a tonne on Thursday, based on SteelHome consultancy data SH-CCN-IRNOR62. Other industry indexes showed prices close to or even above $130 a tonne.

* Rebar on the Shanghai Futures Exchange rose 0.3%, while hot-rolled coil slipped 0.1% and stainless steel eased 0.3%.

* Dalian coking coal gained 1% but coke slid 2.3%. (Reporting by Enrico dela Cruz; additional reporting by Min Zhang in Beijing; Editing by Subhranshu Sahu)

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