Steel and iron ore futures in China dropped around 3 percent on Tuesday, pressured by slow seasonal demand in the world’s top consumer of the two commodities.
Profit margins among Chinese steelmakers have fallen in recent weeks following a sharp rise through March and April when a seasonal pickup in consumption combined with low steel inventories.
The margin of finished steel prices over raw materials has plunged more than 30 percent since the beginning of May, as steel production ramped up in response to the higher profit margins, said a Singapore-based trader.
"In absence of improved demand sentiment or a reversion to pro-growth policy measures in China, steel margins on average may continue to be pressured over the coming weeks," he said.
Construction activity typically weakens from June and through the hot summer weather in China, curbing steel demand.
The most-traded rebar on the Shanghai Futures Exchange was down 2.8 percent at 2,093 yuan ($318) a tonne by the midday break.
The drop came after a 4-percent surge on Monday that traders attributed to expectations of tighter supply in China’s top steelmaking city of Tangshan. Chinese markets were shut on June 9-10 for public holidays.
The Tangshan local government has ordered mills in and near the area to cut production from June 14-21 to ease air pollution, similar to an order it made in May.
The stricter regulations could lower steel production by 500,000 to 1 million tonnes, according to Commonwealth Bank of Australia.
China’s crude steel output rose 1.8 percent from a year ago to 70.5 million tonnes in May, near the record high of 70.65 million tonnes in March.
On the Dalian Commodity Exchange, the most-active iron ore contract fell 3 percent to 360 yuan a tonne.
The weakness in futures could cut bids for physical cargoes, traders said, and drag the spot benchmark further later in the day.
Iron ore for immediate delivery to China’s Tianjin port <.IO62-CNI=SI> slipped 0.6 percent to $51.80 a tonne on Monday, according to The Steel Index.
Other raw material futures fell deeper on Tuesday, with coking coal and coke each tumbling nearly 5 percent on the Dalian exchange.