Chinese iron ore futures surged as much as 3.8 percent on Monday after top miner Vale said it could cut output as dwindling prices pushed it to a third quarterly loss.
There was a broad-based rally in Chinese commodities, with Shanghai copper up nearly 4 percent and rubber climbing as much as 6 percent, as investors returned from a holiday weekend expecting government action to shore up consumer demand.
Data showing China’s factories suffered their fastest drop in activity in a year in April hardened the case for more stimulus to halt a slowdown in the world’s second-largest economy.
The most-traded September iron ore contract on the Dalian Commodity Exchange closed up 3.2 percent at 425 yuan ($68) a tonne, after hitting a session high of 427.50 yuan. Chinese markets were shut on Friday for a public holiday.
Brazil’s Vale said on Thursday it could reduce iron ore production by up to 30 million tonnes over the next two years, in a major strategy shift as the miner focuses on improving margins.
The decision follows BHP Billiton’s earlier announcement that it would delay an Australian port project that would have boosted output by 20 million tonnes.
“We believe the mood of the producers has shifted. Competitive supply growth in this market appears to be ending. This creates upside risk for prices,” Morgan Stanley analyst Tom Price said in a report.
Stronger futures could help lift global spot iron ore prices, which halted a rally last week after gaining 27 percent over three weeks.
Iron ore for immediate delivery to China .IO62-CNI=SI last stood at $56.20 a tonne on April 30, according to The Steel Index.
There was limited trading activity on the physical market so far on Monday, traders said. Vale is offering around 86,000 tonnes of 61.7-percent grade iron ore via a tender later in the day, said a trader in Shanghai.
“If the price stays above $55 or even higher, some of the mines that have shut will resume production and that could boost supply again,” said the Shanghai-based trader.
Australia’s Atlas Iron Ltd, which halted mining in April after a slump in iron ore prices, said it will keep producing at two of its mines this month, citing the rebound in prices.
Hu Xiaodong, analyst at Nanhua Futures in Hangzhou, doubts whether gains in Dalian futures would be sustained.
“Glut is still an issue. Demand from China is now declining, but no one so far can replace its huge demand,” said Hu.