OREANDA-NEWS. China's long steel prices have fallen since winter production cuts were imposed two months ago, as a slowdown in demand outweighs tighter supplies.

China has imposed a 50pc cut in pig iron output across 28 cities in the north and east of the country from 15 November to 15 March, while other cities have implemented varying levels of production restrictions. The curbs aim to reduce coal use by mills in order to cut urban smog during the winter. The cuts are likely to result in a loss of 30mn-50mn t of crude steel output in the four-month period.

The production cuts coincide with the winter slowdown in construction activity in north and east China, which reduces downstream demand for billet, rebar and wire rod. Prices of flat products, which are used mostly in manufacturing, have remained stable.

More than half of China's steel is used in the construction sector. The price of Tangshan billet, a key barometer of construction steel demand, fell by 9.5pc from 15 November to 15 January to 3,490 yuan/t ($542.50/t), while rebar prices have dropped by around 9pc in the same period.

Rebar prices had risen sharply after the winter output cuts began, surging to around Yn5,000/t in early December from Yn4,140/t on 15 November. Prices remained in the Yn4,800-5,000/t range until the second week of December, after which the winter construction slowdown started to erode demand and prices.

Steel mill profits have fallen to around Yn700-800/t from about Yn2,000/t in early December. Market participants expect further declines in profit margins at mills across China to around Yn200/t. Some steelmakers in Shanxi are already reporting profits of Yn200/t, with 20 days of unsold inventories.

But the fall in steel prices has failed to curb gains in iron ore. The Argus ICX price for 62pc imported fines has increased by 23.5pc since 15 November to $76.85/t yesterday.

Seaborne iron ore prices have strengthened on the back of expectations for a surge in iron ore and steel demand after the end of the lunar new year holidays in late February, when construction activity will revive after the winter lull. Mills will also resume normal operations when the output curbs are lifted after 15 March, further boosting demand for iron ore.

But iron ore prices face strong near-term resistance at $80/t. The peak in the ICX over the last couple of months was $79.10/t on 11 January.

Buying interest in high-grade fines and pellet feed concentrate remains robust, although mills are not in any hurry to stock up on cargoes, which could keep any price gains more gradual. But iron ore prices are being supported by unprecedented stockbuilding by mills, with several steelmakers holding up to 30 days of iron ore use, against the typical 25-27 days. Some mills have reported building 45-60 days of stocks to avoid being caught short in the spring and summer.