Chinese steel and iron ore futures edged higher on Thursday, spurred by Beijing's move to hasten construction of railway lines to support a slowing economy, although gains were capped since the boost to steel demand is likely to be limited.
The Chinese cabinet said on Wednesday it would accelerate the construction of projects that have been approved, and increase the total length of lines being laid this year by 18 percent over the 2013 figure.
Besides tax cuts for smaller firms, the steps mark the first concrete action China has taken this year to stiffen its economy, and follow efforts by Premier Li Keqiang last week to reassure jittery markets that Beijing is prepared for support moves.
"Steel demand and production has been set to rise further in the upcoming weeks and months, and the new rail-focused stimulus measures make prospects for construction even more promising," Jeffrey Landsberg, managing director at Commodore Research & Consultancy, said in a note.
But the property sector still accounts for a big chunk of China's steel consumption, and analysts say some major Chinese steelmakers have limited production capacity for rail steel, hence the modest gain in Shanghai rebar futures.
The most-traded rebar for October delivery on the Shanghai Futures Exchange closed up 0.2 percent at 3,336 yuan ($540) a tonne, off a near one-month high of 3,352 yuan reached on Wednesday.
Rebar, used to reinforce concrete in buildings, accounts for about a fifth of steel products produced in China while steel used for railways is limited.
Production of rail steel at Angang Steel and rail wheel rim at Maanshan Iron and Steel make up less than 5 percent of their total capacity, said Helen Lau, senior mining analyst at UOB-Kay Hian Securities in Hong Kong.
"In addition profitability of railway products of Angang is also lower than its other products due to poor pricing from the government," said Lau.
In contrast, property construction, which would be a big boost to steel demand, will remain restricted by tight credit, she said.
Iron ore for September delivery on the Dalian Commodity Exchange rose 1.5 percent to 799 yuan a tonne.
"I think the government cannot really do much to support the economy because the objective is to curb investment in the long term," said Zhou Ting, analyst at Jinrui Futures in Shenzhen.
The moves may not be enough to fuel a strong rebound in benchmark spot prices of iron ore, which fell 2 percent to $115.30 a tonne on Wednesday, according to Steel Index, just two days after climbing 4 percent on hopes for Chinese stimulus measures.
"Some mills are still buying, but they're not taking huge volumes. They're also worried about prices rising too fast," said an iron ore trader in Shanghai.