Shanghai steel futures edged higher on Wednesday after hitting a record low, but the modest gain reflects the crosswinds any price-recovery would face amid signs of economic slowdown in top consumer China.
Talk that China is prepared to loosen monetary policy if economic growth slows further helped sentiment towards steel, although analysts say the sector is unlikely to benefit much from more liquidity with Beijing aiming to curb lending in sectors suffering from overcapacity.
The most-traded rebar on the Shanghai Futures Exchange, for October delivery, was up 0.3 percent at 3,228 yuan ($530) a tonne by midday, after touching 3,141 yuan - the lowest for a most-active contract since the bourse launched rebar futures in March 2009.
The gains in rebar, a construction steel product, followed a four-day decline.
"Fundamentally I don't think there's a big turnaround yet for steel," said Helen Lau, analyst at UOB-Kay Hian Securities in Hong Kong.
Chinese traders held 20.66 million tonnes of steel products at the end of last week, down slightly from 20.82 million tonnes the week before, data from industry consultancy Mysteel showed, indicating demand remains weak.
Steel production has recovered faster, with the daily pace of crude steel output rising to 2.08 million tonnes in the last 10 days of February from 1.97 million tonnes in the previous 10-day period, according to estimates from the China Iron and Steel Association.
"The quick rebound in production was too much and will lead again to oversupply. As such we expect to see the downward trend in steel prices continuing," said Lau.
"I also doubt if any move to increase liquidity will benefit the steel sector, being one of those suffering from overcapacity that China is trying to address."
China's central bank is ready to cut the amount of cash that banks must keep as reserves, sources involved in internal policy discussions say, in a move aimed at boosting lending to support the economy. A cut would be triggered if growth slips below 7.5 percent and towards 7.0 percent, they said.
The weakness persists in China's iron ore futures although prices have recovered from session lows.
Iron ore for September delivery on the Dalian Commodity Exchange was down 0.7 percent at 726 yuan a tonne, after falling to a contract low of 705 yuan earlier. Volume traded reached nearly 590,000 lots, a record high for the contract.
Buying interest in the iron ore spot market remained lean, with prospective buyers anticipating a further decline in prices.
Iron ore for immediate delivery to China .IO62-CNI=SI gained 0.2 percent to $104.90 a tonne on Tuesday, stabilizing after sliding by 8.3 percent the previous day to its lowest since October 2012, according to data from Steel Index.
Monday's slide was the steepest for iron ore since August 2009 and prompted some traders and mills to seek a delay in shipments of cargoes due next month on fear prices may fall further.
"Over the next two to three weeks we can see the price coming down to $90 as more supply comes into spot," said a trader in Singapore.
"I think it's healthy for the market. I'm sure prices will rebound strongly, the question is when."