China's steel sector is exhibiting stronger mill margins and sentiment in April that may soon lead producers to "step up purchases of both iron ore and coking coal," Macquarie Bank said.

Mill inventory of iron ore is stable while coking coal destocking is still evident, the bank's report said, citing its monthly survey of mills and traders of steel and iron ore.

A return to stronger raw materials purchasing would help support prices, but the bank said expected steel demand growth and restrictions in place on steel production in China may see mill margins benefiting the most.

"As we have previously argued, the end of destocking should be positive for raw material prices over the coming months," it said. "Although with steel demand looking stronger than expectations and with continued production restrictions still in place, we wonder whether steel mills might be the biggest beneficiaries of the apparent upturn in market conditions."

Steel traders in China improved sales strongly in April, while steel mills' orders are still contracting albeit at a slower rate than in March, Macquarie said.

Construction and infrastructure were the strongest sectors for steel demand over the last two months, it said.