(Updates prices)
By A. Ananthalakshmi
SINGAPORE, Dec 28 (Reuters) - Dalian iron ore futures rose 1 percent on Monday, extending a recent rally that has given the plunging commodity some year-end respite, but physical activity remained tepid, offering little hope for a price recovery next year.
Global oversupply and shrinking Chinese steel demand have pummeled iron ore prices, with the spot rate of the steel-making commodity down 44 percent this year.
Prices, however, have seen a modest uptick in the last two weeks as traders closed out a contract expiring in December, a Shanghai-based trader said, although he wasn't optimistic about the rally continuing.
The most-active May iron ore contract on the Dalian Commodity Exchange DCIOcv1 rose 1.5 percent to close up at 309 yuan ($47.64) a tonne, after closing higher for a second straight week on Friday.
"Activity on the physical side is very quiet. Most of the buyers in the market are not ready to take new cargoes at the end of the year," said the trader. Obtaining letters of credit during the holiday-shortened week was also hampering deals, he said.
The most-traded May rebar contract on the Shanghai Futures Exchange SRBcv1 closed up 0.7 percent at 1,741 yuan ($268.44) a tonne.
Steel futures had gained for three straight weeks to Friday as some factories cut production at the end of the year.
China's steel demand continued to shrink this year after falling in 2014 for the first time in more than three decades, further tightening cash flow among producers and limiting their access to bank loans.
"Some mills have stopped production and they will not resume production very soon. This will give some support to steel prices but it is bad news for iron ore as it means demand for iron ore may not increase even after the holiday," the Shanghai trader said.
Iron ore for immediate delivery to China's Tianjin port .IO62-CNI=SI was priced at $40.20 a tonne on Thursday, unchanged from the previous two sessions, according to The Steel Index. The price was not published for Friday due to the Christmas holiday.
Iron ore could fall below $30 a tonne in the next few months, forcing more high-cost suppliers out of business, a Reuters poll showed earlier this month.
Rebar and iron ore prices at 0803 GMT
Contract
Last
Change Pct Change SHFE REBAR MAY6
1741
+12.00
+0.69 DALIAN IRON ORE DCE DCIO MAY6
309
+4.50
+1.48 METAL BULLETIN INDEX
41
+0.18
+0.44
Dalian iron ore and Shanghai rebar in yuan/tonne Index in dollars/tonne, show close for the previous trading day
($1 = 6.4855 Chinese yuan)