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China plans $720B infrastructure investment, but iron ore still oversupplied

Is the iron ore rally sustainable?
Iron ore's rally won't last: Pro
'Iron ore to stay around $50'

China plans to invest CNY4.7 trillion ($720 billion) on 303 transport infrastructure projects over three years but that may not be enough to give a strong boost to commodity prices in an oversupplied market.

On the back of expectations for infrastructure construction and a strong property market, iron ore prices have rallied as much as 86 percent from its record low in December, although prices have eased somewhat in recent days.

Any optimism from recent run-ups may be misplaced as investors come to the realization that there is still too much supply as growth in China slows, some analysts say.

Despite the huge headline figure for government infrastructure investment, the amount is a "major drawdown despite recent years," said IHS Global Insight's China economist Brian Jackson.

After all, China invested just over CNY4 trillion in similar transport infrastructure categories in 2015 alone, so the three-year infrastructure plan recently announced represents a nearly two-third reduction in total transport investment if not complimented by additional projects, he added.

"As always in China, the enormous size of the economy makes any spending figure seem astounding, but on its own, the data is of limited value for those assessing macroeconomic or even sector-level growth," he said in a note on Friday.

Platts' editorial director Annalisa Jeffries said with large iron ore supplies coming on stream, the market is looking at prices around $40 a ton in the longer-term, although prices are likely to have found a floor at $50 a ton in the short-term.

Fitch's unit BMI Research said in a note that even the rally in steel thus far this year is likely to be short-lived.

Iron ore is used to make steel.

"The recent steel price rally was in response to high demand from Chinese steel users restocking the metal, the improvement in the country's construction sector stemming from government stimulus measures implemented in the housing market and positive investor sentiment. However, Chinese demand will weaken, resulting in an oversupplied market, pushing prices lower over the coming quarters," wrote BMI analysts in a note.

Any benefits of the huge infrastructure budget injection will take time to filter through, Platt's Jeffries told CNBC's The Rundown on Monday.

Indeed, a People's Daily report last week citing an "authoritative person" indicates a departure from monetary and fiscal stimulus to stimulate growth, wrote analysts at Invesco.

The longer-term slowdown in building is consistent with China's 2016 Work Report.

"While China is certain to maintain a large pipeline of infrastructure projects to prop up growth in some regions' labor markets, as well as stabilize demand for construction materials sectors, current government plans are for this pipeline to diminish gradually over time, not to expand," said Jackson.

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