Chinese steel prices are enjoying a powerful rally, but the gains may just be a false dawn as the issue of excess capacity remains unresolved.
Rebar futures in Shanghai soared 6 percent on Wednesday, extending a three-day winning streak to close at a 14-month high.
Prices are more than 40 percent higher year-to-date thanks to a period of tightened supply and healthy demand from the real-estate market, which accounts for 50 percent of Chinese steel consumption. The rally represents a turnaround from a more somber mood last year as concerns over China's economic health caused prices to tank.
Mainland steel companies were making huge losses last year so they cut back production quite sharply, resulting in mills, traders and end users in the manufacturing sector rapidly using up existing stocks towards the end of 2015 and early this year, explained Paul Bartholomew, senior managing editor at Platts.
That led to stronger-than-usual seasonal restocking typically seen over the Lunar New Year period, reflected in March data showing the world's biggest steel producer churning out a record 70.65 million tonnes of output.