Steel and iron ore futures in China advanced on September 12, regaining some lost ground after a five-day retreat, with demand seen remaining intact in the world's top consumer of both commodities.
Underlining firm steel consumption in China, the country's biggest listed steelmaker, Baoshan Iron & Steel, raised prices of its main products for October delivery.
The strength in iron ore prices largely reflects stronger profit margins among Chinese steel mills, said Commonwealth Bank of Australia analyst Vivek Dhar.
"As long as steel margins remain elevated, the incentive for steel mills is to purchase iron ore to boost steel production in the short term," Dhar said in a note.
"With steel capacity utilization in China roughly at 70-75%, there is still more than enough scope for China's steel production to rise."
Iron ore on the Dalian Commodity Exchange climbed 3.4% to 549 yuan/t. Coking coal jumped 4.4% to 1,466 yuan/t and coke rose 4.1% to 2,468 yuan/t.
Chinese steel producers, particularly of construction steel product rebar, have been seeing their best profits in years, supported by China's infrastructure spending and supply restrictions as authorities crack down on polluting industries.
Steel inventory at Chinese traders rose 1.7% as of September 8 from the previous week and at mills by 7.4% as of August 20 from August 10, Morgan Stanley analysts said in a report.
The increase reflected "production increase and restocking before winter production cuts, but in our view this should be digested soon with peak season starting," the analysts wrote.
Chinese authorities have ordered major key steel producing areas such as Hebei province to cut output by up to half during winter to fight smog.
Iron ore for delivery to China's Qingdao port .IO62-CNO=MB edged up 0.2% to $74.49 a tonne on Monday, according to Metal Bulletin, after touching a three-week low on September 8.
(Writing by Alex Guo Editing by Harry Huo)
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