January 18, 2018 / 7:56 AM / a month ago

UPDATE 1-China iron ore bounces back after 5-day fall on firmer steel

* Significant price volatility in iron ore seen -CBA analyst

* China 2017 steel output hits record 831.7 mln tonnes (Adds China steel output, updates prices)

By Manolo Serapio Jr

MANILA, Jan 18 (Reuters) - Chinese iron ore futures edged higher on Thursday as firmer steel prices helped the raw material rebound after a five-day slide, with coke prices also recovering.

Restrictions on steel production in northern Chinese cities during winter have dented demand for iron ore and dragged prices lower. Despite those curbs though, China’s crude steel output hit a record 831.7 million tonnes last year, up 5.7 percent, government data showed.

Other data released on Thursday showed China’s economy grew 6.8 percent in the fourth quarter of 2018 from a year ago, beating market expectations.

Commonwealth Bank of Australia analyst Vivek Dhar expects iron ore prices to rise as the curbs, in place since mid-November, are lifted by mid-March.

“While we expect iron ore prices to trend higher this quarter, price volatility should be significant,” Dhar said in a note.

The most-traded iron ore contract for May delivery on the Dalian Commodity Exchange closed up 1.4 percent at 537 yuan ($83) a tonne. The contract hit a 2-1/2-week low of 525.50 yuan on Wednesday.

Coke climbed 0.7 percent to 1,966.50 yuan a tonne and coking coal added 0.2 percent to 1,276 yuan, both gaining after a six-day tumble.

While China’s steel production restrictions have hit demand for iron ore, prices of the raw material have been largely resilient as they tracked gains in steel prices which have risen due to the output curbs.

With the curbs expected to be lifted by March, margins at steel mills could slip.

“Steel mill margins have declined steeply on the back of falling steel prices in China. With steel margins contracting, iron ore markets could face a sharp price correction in coming months,” Dhar said.

Iron ore for delivery to China’s Qingdao port .IO62-CNO=MB fell 1.6 percent to $74.51 a tonne on Wednesday, its weakest levels since Dec. 29, according to Metal Bulletin.

“Seasonal demand for steel is normally low in winter so we see steel prices heading down despite the production cuts,” said a trader in Shanghai, referring to the recent decline in Chinese steel prices.

Shanghai rebar has lost 6 percent since hitting a three-month high of 4,104 yuan on Dec. 4.

On Thursday, the most-active rebar on the Shanghai Futures Exchange rose 1.1 percent to 3,859 yuan a tonne. ($1 = 6.4335 Chinese yuan) (Reporting by Manolo Serapio Jr.; Editing by Joseph Radford)

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