Shanghai steel rebar futures rose to a record Wednesday after traders returned from a week-long Lunar New Year holiday anticipating a pickup in demand.
The price rise comes on the heels of increasing cost of raw materials iron ore and coal and ahead of an expected recovery in steel demand in China - the world's top consumer, despite its interest rates hike Tuesday for the second time in six weeks.
"We're in the time of year when traders build steel inventory, so while real demand is weak at the moment, traders are restocking through it expecting stronger demand in the following month," said Graeme Train, analyst at Macquarie in Shanghai.
"I wouldn't be surprised if steel prices continue rising. Chinese production is still below the run-rate that even more conservative forecasters are predicting for this year and as a result they're probably still under-producing steel so you'll need to incentivise that production by having prices rise."
Crude steel output by China, the world's biggest producer, is forecast to rise 6 percent this year from a record 627 million tons in 2010, according to a Reuters poll of analysts in December. The projected growth rate, however, is slower than the 9.3 percent pace in 2010.
The most active reinforcing bar, or rebar, contract for October delivery on the Shanghai Futures Exchange was up 0.2 percent at 5,136 yuan ($779) a ton by 0302 GMT, after touching an all-time high of 5,150 yuan ($781) earlier.
China's latest quarter percentage point rate hike is unlikely to adversely hurt steel demand, analysts say.
"China's aim is to slow growth and not slow demand in absolute terms. I think everybody has been factoring in slower growth rate this year than last year and some policy is needed to ensure that happens, so I don't think anyone should be surprised by this rate hike," said Macquarie's Train.
Continued restocking by steelmakers should translate to more iron ore purchases, which could drive spot prices of the raw material even higher.
