LAUNCESTON, Australia, Aug 1 (Reuters) – China’s surging steel sector is pulling iron ore along for the ride, but the strong gain in prices raises the risk that marginal supply of the raw material will start to flow into what is already a well-supplied market.
Steel prices in Shanghai received another boost on Monday on the back of an increase in China’s Purchasing Managers’ Index (PMI) for the sector, which climbed to 54.9 in July from 54.1 in June, marking the third consecutive month that the indicator was above the 50-level that demarcates expansion from contraction.
The steel PMI was also at its highest in 14 months, which helped boost benchmark Shanghai steel rebar futures to a close of 3,663 yuan ($545) a tonne, taking the year-to-date increase to almost 38 percent.
Strong demand for steel on the back of increased spending on infrastructure and housing construction have prompted China’s mills to ramp up output to record monthly levels. The positive steel story has ensured that iron ore has come along for the ride, with the spot price .IO62-CNI=MB jumping 7.2 percent on Monday to end at $73.70 a tonne.
The steel-making ingredient has surged 38.1 percent since the low so far this year of $53.36 a tonne, reached on June 13. China’s domestic iron ore futures on the Dalian Commodity Exchange have also enjoyed strong gains, ending at 554.5 yuan a tonne on Monday, up 32 percent since the recent low of 420.5 yuan on June 14.
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