News of a possible restructure in the Chinese steel industry has been the driver behind firmer steel prices in recent months, it said.

“Just last month Baosteel Group and Wuhan Iron & Steel announced that they would undergo a joint strategic restructuring,” it said.

“This stoked some hope that the overcapacity that has been plaguing the steel industry for the past few years could be alleviated.

“This was followed this week by news that the Hebei was restricting output of steel in July. This was to supposedly improve air quality around memorial activities for the 40th anniversary of one of China’s deadliest earthquakes.”

This has resulted in steel rebar prices in China climbing nearly 5% this week, and over 15% since the start of June.

Consolidation in the steel industry should help alleviate the overcapacity issues in China, in turn keep pushing steel prices higher, according to ANZ.

“This will ultimately result in lower steel production, which will be a negative for iron ore demand,” it said.

“Ultimately consolidation will be driven market forces. Profitability of China steel industry remains weak; however the higher steel prices seen over the past few weeks are raising the risk that more steel capacity will be reactivated.

“Using spot prices for raw materials compared with steelprices, we calculate that the profitability of integrated steel making in China has picked up from a loss of $US45 per tonne in mid-June to a profit of $130/t.”