Chinese steel futures rose for the first time in seven sessions on Wednesday on a pick-up in seasonal demand, but gains are expected to be limited by chronic oversupply and slow manufacturing growth.
China's steel consumption growth is set to slow to 3 percent this year, half the rate in 2013, the China Metallurgical Industry Planning and Research Institute said earlier in the year, as weak economic growth in the world's second-biggest economy hits industrial demand.
"Rebar futures have fallen too much and the downside room is limited, but I don't expect gains to be big as steel-consuming sectors have lost steam, capping steel demand," said Qiu Yuecheng, an analyst with steel trading platform Xiben New Line Co Ltd in Shanghai.
Benchmark October rebar futures on the Shanghai Futures Exchange had inched up 1 percent to 3,266 yuan ($522) a tonne by close. They had lost 4 percent in the previous six sessions.
China's factory activity shrank for the fourth straight month in April, signalling economic weakness had stretched into the second quarter, a preliminary survey showed on Wednesday, although the pace of decline eased helped by policy steps to arrest the slowdown.
The HSBC/Markit flash Purchasing Managers Index (PMI) for April rose to 48.3 from March's final reading of 48.0, still below the 50 line separating expansion from contraction.
Signs of a slowdown in the first quarter had been evident in a series of economic indicators, prompting the government to unveil a series of measures to promote growth, but it has ruled out major stimulus.
Steel use typically improves in the second quarter as construction and manufacturing activity pick up during the warmer months.
"Since Beijing has rolled out mini-stimulus, China's economic growth is expected to be maintained in a reasonable range and steel demand will also grow," the China Iron & Steel Association (CISA) said in a monthly report on Wednesday.
"But the oversupply will not be improved in the short term, and steel prices will be unlikely to go up much."
The most active iron ore contract on the Dalian Commodity Exchange, for September delivery, had rebounded 1.4 percent to close at 786 yuan.
"If steel prices can't reach high levels in the second quarter, the downside risks for iron ore will accelerate," CISA said in another report on Tuesday, adding that global miners have increased shipments since April.
A cargo of 80,000-tonne Australian iron ore fines with 62-percent grade was sold at $112 a tonne, delivered to China in early June, down up to $5.5 from last week, traders said.
Iron ore for immediate delivery to China .IO62-CNI=SI dropped 0.7 percent to $112.5 a tonne on Tuesday, its lowest since March 28, according to data provider Steel Index. It has fallen about 16 percent this year as the slowing Chinese economy curbs its demand for the steelmaking raw material.