Shanghai rebar steel futures rose on July 4 after China said it will intensify the closure of outdated and excess steel capacity from this year through 2020 as part of its anti-pollution plan.
But prices ended well below the day's peaks as a growing trade row between the United States and China weighed on sentiment.
China's threatened tariffs on $34 billion of U.S. goods will take effect from the beginning of the day on July 6, a person with knowledge of the plan told Reuters, amid worsening trade tensions between the world's two largest economies.
Washington has said it would implement tariffs on $34 billion of Chinese imports on July 6, and Beijing has vowed to retaliate in kind on the same day.
China's plan to eliminate some industrial capacity will widen to cover 82 cities across the country, compared with 28 cities across Hebei province and the cities of Beijing and Tianjin that were subject to the rules previously.
That should help tighten supply of steel in China, the world's biggest producer, boosting prices.
The most actively traded September rebar contract on the Shanghai Futures Exchange closed up 0.9% at 3,783 yuan/t ($573/t), after rising as much as 1.8% intraday.
"Restricting production and closing old capacities in certain areas suggest that the total supply of steel will be quite limited," said a Shanghai-based trader.
Demand also remains steady and could only weaken in the second half of July and through August when the hot weather intensifies and curbs construction activity, he said.
"The market is still okay so the price is still holding up."
Also supporting investor sentiment was data showing that growth in China's services sector accelerated in June to a four-month high as well as a sharp recovery in the yuan, a day after the central bank governor assured markets the central bank would keep the currency stable amid heightened worries about trade frictions.
Prices of steelmaking raw materials coking coal and iron ore dropped. Iron ore traded on the Dalian Commodity Exchange slipped 0.4% to 462 yuan/t and coking coal fell 0.8% to 1,154.50 yuan/t.
Coke rose 0.9% to 2,045 yuan/t.
Spot iron ore for delivery to China's Qingdao port .IO62-CNO=MB was little changed at $64.55/t on July 3, according to Metal Bulletin.
Sources:sxcoal
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