Spot iron ore at near 5-1/2 month high as China buys

By Ruby Lian and Fayen Wong

SHANGHAI, Dec 20 (Reuters) - Spot iron ore jumped to its

highest in almost five-and-a-half months on Wednesday with

buyers in top consumer China picking up cargoes to rebuild

stockpiles, although the swift rally in prices along with softer

steel gains might curb purchases.

The improved outlook as China's economy revives along with a

rapid drawdown at port inventories of the steelmaking raw

material have encouraged traders to pick up cargoes, boosting

prices by 17 percent so far this month.

The benchmark index for 62-percent grade iron ore jumped 2.5 percent or $3.3 to $135.50 a tonne, a

level last seen on July 10, according to the Steel Index.

'Steel mill restocking and improved demand expectations have

seen mills drawdown port stocks of iron ore and maintain solid

steel output run rates ahead of the usual winter demand

slowdown,' Lachlan Shaw, a senior commodities analyst at

Commonwealth Bank of Australia said in a research note.

China's 78 big steel mills, accounting for around 80 percent

of the total output, raised the average daily output by 1

percent to 1.657 million tonnes between Dec 1-10, although

smaller mills slashed output by 9.7 percent.

'A sustained recovery in real estate contract sales into the

first half of 2013 is needed to keep iron ore price momentum

elevated,' Shaw added.

A cargo of 10,000 tonnes Australian iron ore fines with 62

percent iron grade was offered at $140 a tonne for February

delivery on Thursday, up about $2 compared with a cargo bought

at $137.88 a tonne on Wednesday, according to traders.

Traders are holding low inventories at the moment as they

managed to cut down their stocks over the past few months when

prices slumped to three-year lows amid the cooling economy.

'There is risk if steel mills buy cargoes at the current

high prices, as weak steel prices are denting mills' profit,'

said an iron ore buying official with a northern mid-sized mill.

The most active rebar futures for May delivery on the

Shanghai Futures Exchange fell 1 percent to 3,779 yuan

($610) a tonne by midday break on Thursday.

Shanghai steel futures have risen less than 1 percent so far

this week, compared with gains of 3 percent last week and 4

percent the week before.

Steel demand typically declines in northern China regions

towards the end of the year as the cold weather hits

construction activities, denting consumption of rebar. However,

a steep drop in inventories may spark a stronger price recovery

when traders start to restock.

Shanghai rebar futures and iron ore indexes at 0330 GMT

Contract Last Change Pct Change

SHANGHAI REBAR* 3779 -39.00 -1.02

PLATTS 62 PCT INDEX 137.25 3.75 2.80

THE STEEL INDEX 62 PCT INDEX 135.5 3.30 2.50

METAL BULLETIN INDEX 136.46 2.48 1.85

*In yuan/tonne

#Index in dollars/tonne, show close for the previous trading day

($1 = 6.2303 Chinese yuan)

(Reporting by Ruby Lian and Fayen Wong; Editing by Himani

Sarkar)

Keywords: MARKETS IRONORE/

(ruby.lian@thomsonreuters.com)(+86 21 6104 1797)(Reuters Messaging: ruby.lian.thomsonreuters.com@reuters.net)

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