Shanghai steel futures ended lower on Thursday, tracking weaker equities, although losses were stemmed by hopes that demand for the building material would bounce back as construction activity thickens in top steel consumer China.
There is sizable ground for Chinese rebar futures to recover, having fallen to record lows last week. Analysts and traders, though, say any rebound may be limited by an economy which may expand more slowly this year.
The most-traded rebar contract for October delivery on the Shanghai Futures Exchange closed down 0.3 percent at 3,230 yuan ($520) a tonne, after rising as high as 3,278 yuan.
Chinese equities fell more than 1 percent, reflecting investor caution over risks of default in the property sector.
Still, rebar, a construction steel product, has risen 2.8 percent since hitting a record trough of 3,141 yuan on March 12.
"Traders are trying to restock because the weather is getting warmer so the construction sector will recover. The price has fallen so much so it's favourable for restocking," said Zhou Ting, analyst at Jinrui Futures in Shenzhen.
Inventory data this week may show an increase in stockpiles of steel products in China that have only dropped slightly over the past weeks, said Ting.
Total steel stocks held by Chinese traders stood at 20.25 million tonnes as of March 14 versus 20.73 million tonnes in the last week of February, according to data from industry consultancy Mysteel.
"But the downward pressure on the price is still high for the longer term because of slower economic growth in China," said Ting, who sees rebar's near-term upside capped at 3,400 yuan.
The Shanghai exchange will debut hot-rolled coil futures contracts on Friday, offering another hedging tool for steelmakers amid increasing price volatility.
Iron ore buyers remained cautious with Chinese mills still wary spot prices may have further room to decline on expectation of increased supply.
Iron ore for immediate delivery to China was unchanged at $110.50 a tonne on Wednesday, according to data provider Steel Index.
The price of the steelmaking raw material has rebounded 5.5 percent since falling to a 17-month low last week.
A sustained gain in steel prices would further boost China's steel output and its need for imported iron ore. The country's daily crude steel output averaged 2.097 million tonnes in the first 10 days of March, the highest since mid-November, according to the China Iron and Steel Association.
However, the group said that output among its 86 members, which generally have a larger capacity than non-members, fell 8 percent to 1.804 million tonnes a day compared to late February.
"This may indicate increasing margin pressure from rising labour and environmental compliance costs, which the smaller non-member mills may not yet be bearing," Commonwealth Bank of Australia said in a note.
At the Dalian Commodity Exchange, iron ore for delivery in September was flat at 733 yuan a tonne.