(Updates prices)
By A. Ananthalakshmi
SINGAPORE, Dec 29 (Reuters) - Shanghai rebar futures rose nearly 3 percent on Tuesday on expectations that production cuts by Chinese mills may contribute to further reduction in already historically low stockpiles, although overall demand remains soft.
Steel mills in top consumer China have recently cut output on weak demand. The approach of the lunar new year holiday in February will also prompt some factories to lower production.
The production cuts have come at a time when rebar stockpiles have dropped as inventory holders use up existing supply.
Stocks of rebar, a steel product used in construction, stood at 3.636 million tonnes at 28 major cities in China on Dec. 25, according to industry consultancy SteelHome. That is the lowest since the data became available in 2011.
"There seems to be a shortage on the supply side that might be a factor driving up prices," said Kevin Bai, an analyst at industry consultancy CRU in Beijing, adding the gains will be short-lived. "The stock level right now is quite low compared to historical levels."
The most-traded May rebar contract on the Shanghai Futures Exchange SRBcv1 closed up 2.7 percent at 1,780 yuan ($274.51) a tonne.
Still, Bai cautioned that "there is no fundamental change on the demand side" and Chinese construction activity is now slowing due to winter, especially in the country's northeast.
Even before the onset of the cold weather, China's steel demand was set to drop this year, after falling in 2014 for the first time in more than three decades.
More than 50 million tonnes of steel capacity have shut in China this year, including state-owned and private steelmakers, according to CRU.
China's government is looking to slash even more steel capacity, making it a top priority over the next five years and establishing a fund to assist the cutbacks, state news agency Xinhua reported earlier this month. urn:newsml:reuters.com:*:nL3N14C1ZC
China's steel demand weakness, along with a global glut, has pummeled prices of iron ore this year, with the spot rate falling 44 percent this year.
The most-active May iron ore contract on the Dalian Commodity Exchange DCIOcv1 rose 2.9 percent to 316 yuan ($48.73) a tonne.
Iron ore for immediate delivery to China's Tianjin port .IO62-CNI=SI was priced at $40.50 a tonne on Monday, up 30 cents from the previous session, according to The Steel Index. TSI did not publish the numbers on Friday due to the Christmas holiday.
Contract
Last
Change Pct Change SHFE REBAR MAY6
1780
+47.00
+2.71 DALIAN IRON ORE DCE DCIO MAY6
316
+9.00
+2.93 SGX IRON ORE FUTURES JAN
41.32
+2.12
+5.41 THE STEEL INDEX 62 PCT INDEX
40.50
+0.30
+0.75
METAL BULLETIN INDEX
41.3
+0.30
+0.73
Dalian iron ore and Shanghai rebar in yuan/tonne Index in dollars/tonne, show close for the previous trading day
($1 = 6.4843 Chinese yuan)