Firm swaps point to iron ore bounce when Chinese return

By Manolo Serapio Jr

SINGAPORE, Oct 3 (Reuters) - Gains in prices of iron ore forward swaps this week suggest spot rates could rebound when top consumer China returns next week after a holiday.

The price of spot iron ore

ended the third quarter down more than 22 percent, its biggest three-month loss ever, as an economic slowdown in China slashed the country's appetite for the steelmaking raw material.

Traders expect Chinese steel mills to replenish iron ore inventories after the Oct. 1-5 Golden Week break, with domestic steel prices slowly on the mend, and the country's steel production staying high.

"Prices are probably going to push up a little bit because some mills, which have depleted stocks, need to restock," said a Singapore-based trader.

But prices are unlikely to recover back soon to the $120 zone, the trader said, a level last seen in July, unless China's steel demand bounces back significantly.

Benchmark iron ore with 62 percent iron content was unchanged at $104.20 a tonne for a fifth straight day on Tuesday, according to data provider Steel Index.

The price of the November iron ore swap contract

gained 55 cents to $106.67 a tonne on Tuesday, reflecting investor expectations that spot rates will rise.

The December contract rose 63 cents to $107, with further forward contracts

also up, although the price gains were not backed by liquidity, with China's holiday sidelining many traders.

The contracts are cleared by the Singapore Exchange, which clears the bulk of cash-settled iron ore swaps traded globally.

Volume fell to 100 lots, or 50,000 tonnes, on Tuesday from Monday's 340 lots, well below last month's daily peak of nearly 4,000 lots, based on Singapore Exchange data.

Iron ore hit a three-year low of $86.70 last month and while prices have since recovered to stand above $100, they have struggled to push higher in the face of poor steel demand in the world's biggest consumer. Iron ore indexes Last Change Pct Change PLATTS 62 PCT INDEX 106.5 +0.00 +0.00 THE STEEL INDEX 62 PCT INDEX 104.2 +0.00 +0.00 METAL BULLETIN INDEX 106.46 +0.00 +0.00

Index in dollars/tonne, show close for the previous trading day

(Reporting by Manolo Serapio Jr.; Editing by Clarence Fernandez)

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