Seaborne iron ore prices continued their rebound on Tuesday, spurred by hopes that marginal iron ore producers may attempt to control output. Steel futures also continued their rebound as steel production appeared to be moderating. The real challenges for both markets are yet to come however, Kallanish notes.

The Kallanish index for 62% Fe Australian fines came in at $56.21/dry metric tonne cfr Qingdao - $1.50/t higher than on Monday. Two trades on the GlobalOre exchange suggested buyers were willing to pay at current price levels. 80,000t of ore under the MNP category traded at $55.50/t cfr Qingdao for April delivery, followed by another 190,000t of PB fines at $56.50/t for May delivery.

Chinese steel futures were again stronger on Tuesday. The October 2015 rebar contract on the Shanghai Futures Exchange closed up another Yuan 23/t at Yuan 2,542/t ($414/t), while the May contract for hot rolled coil on the same exchange closed up Yuan 16/t at Yuan 2,554/t.

Hints from miner FMG that a strategic partner could be sought for some assets (see separate article) sparked some hope of a slight fall in production. As a core supplier of 58% Fe material, FMG would likely have some pricing power if it was to limit output.

However, the real challenge for both steel and iron ore is still ahead. For iron ore, the key will be how the market can be balanced when Rio Tinto is shipping a full 360 million t/year and Roy Hill is shipping its ore. Prices are still expected to fall again in Q3.

For steel, mills have reduced output, with many blast furnaces reportedly no longer operating, and this has given them some pricing power. Whether this can be sustained into Q3 considering growing inventories at mills and sharp declines in construction steel demand is uncertain, Kallanish notes.