SINGAPORE - Shanghai steel futures dropped more than 2 per cent on Monday in a broad-based sell-off of risky assets after China's economy grew less than expected in the first quarter, suggesting softer demand in the world's top commodity consumer.
The weakness in steel prices knocked down iron ore swaps as investors bet on softer spot rates with Chinese demand for the steelmaking raw material likely to take a hit.
The most-traded rebar contract for October delivery on the Shanghai Futures Exchange touched a session low of 3,711 yuan (S$740) a tonne, not far off a four-month low of 3,705 yuan hit in early April.
It closed at 3,738 yuan, down 2.4 per cent.
China's economy grew at an annual rate of 7.7 per cent in the first quarter, below market expectations for an 8.0 per cent expansion and frustrating investors hoping the world's No. 2 economy would rebound after posting its weakest growth in 13 years in 2012.
"The data suggests that China's economic recovery is extremely weak, much slower than expected, while steel output remains at record levels, which will put downward pressure on steel prices," said Qiu Yuecheng, an analyst with steel trading platform Xiben New Line Co Ltd in Shanghai.
China has been producing crude steel in excess of 2 million tonnes a day since February as mills in the world's biggest steel consumer and producer banked on demand that usually peaks during the second quarter.
The Chinese data came after soft US retail sales and consumer sentiment numbers raised doubts about the economic recovery momentum in the world's top economy, driving down commodities and equities on Friday.
"Near term, commodities could remain under pressure because the two giants in Asia (China and India) have shown that they are not doing that well, euro zone indicators are looking at a deepening recession and US greenshoots are not sprouting up at a spectacular rate either," said Vishnu Varathan, market economist at Mizuho Corporate Bank.
Iron ore swaps fell in sympathy with Chinese steel futures. The May contract traded as low as US$134 (S$165) a tonne after settling at US$138.50 on Friday, while the June contract slipped to a trough of US$129 from US$133.37, traders said.
Benchmark 62-per cent grade iron ore .IO62-CNI=SI was flat at US$141 a tonne on Friday, according to data provider Steel Index, as buying interest tapered off.
Lower inventories of iron ore prodded Chinese steel mills to restock last week, helping iron ore prices gain nearly 4 per cent for the week, the biggest such gain since early January.
But the restocking pace has been modest with mills limiting raw material stocks given a cautious outlook for steel demand.