UBS Says Mills Adding Output Before Parade Is Boost to Iron

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Steelmakers in China may be ramping up output before the government orders production cuts at some mills to ensure clean air in Beijing for a parade, according to UBS Group AG, which said the increase may be boosting iron ore.

“I have heard there may have been some modest pickup in steel production ahead of enforced cutbacks in late August, early September for World War II end-commemoration in China,” analyst Daniel Morgan said on Wednesday.

Steel output in the world’s top producer is set to be disrupted this month and in September as mills around Beijing are ordered to cut supply to ensure blue skies for the parade, which marks the end of World War II, as well as a sports event. Iron ore dropped to a six-year low below $45 a metric ton in early July as Rio Tinto Group and Vale SA raised output into an oversupplied market, before rallying back into a bull market. UBS’s Morgan said prices of about $50 a ton are reasonable.

“We could easily see sub-$45 a ton as part of the normal volatility in this space, but I don’t think prices would sustain levels below $40,” Morgan said in an e-mail, referring to the cost of benchmark supplies landed in China.

Ore with 62 percent content in Qingdao entered the bull market last week, rebounding from the low of $44.59 a dry ton on July 8, according to Metal Bulletin Ltd. Prices rose 2.7 percent to one-month high of $56.78 on Wednesday. They’re still 20 percent lower this year.

Japan’s Surrender

China’s leadership is scheduled to host the parade in Tiananmen Square on Sept. 3 to commemorate the 70th anniversary of Japan’s surrender. Before that, Beijing will host the world track and field championships from Aug. 22-30.

As much as 6 million tons of steel production may be cut, more than was lost last year when similar curbs were used for a global summit, according to Mysteel Research’s chief analyst Xu Xiangchun, who cited talks with policy makers and mills. The restrictions will cover Hebei, China’s biggest steel-producing region, as well as Beijing and Tianjin.

The output disruption may reduce demand for iron ore by about 10 million tons, Australia & New Zealand Banking Group Ltd. wrote in a note on Monday. Macquarie Group Ltd. said that the move risked spurring volatility in iron ore prices.

Iron ore and steel prices in China climbed in recent days. Iron ore futures advanced 2.9 percent to close at 377 yuan ($60.71) a ton in Dalian on Wednesday, the highest in a month, as spot rebar advanced for an eighth day to cap the longest rising streak since October.

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