Chinese steel futures surged by over 6% on Monday, building on last week’s advance which followed concerns of tighter supply as China extended its crackdown on polluting steel makers.

Last week, Shanghai rebar steel futures climbed 8.1% to reach six-week high. Now, on Monday as Chinese steel futures extended their advance they hit a nine-week peak. Before this ascent, Chinese steel futures had run into some resistance on the expectation that demand for steel from China would wane in the coming months as the country’s massive stimulus programs come to a close.

But, steel returned to the upside following news that Tangshan city in Hebei province, China’s biggest steelmaking region, launched a campaign to crackdown on steel mills that fail to meet emissions standards. Mills found to be in violation will face fines and suspensions. This could tighten steel inventories, and as a result, traders once again have bet on higher steel prices.

The campaign will last through the end of May, but it will take some time for suspended mills to get production up and running. As a result, steel prices could find support for a few weeks past the campaign’s end. But, over the longer term steel prices should once again meet resistance. “We don’t think these environmental inspections will have significant impact unless the government can give a very clear order on production cuts and not just controlling emission levels. I believe a lot of these plants have already installed the necessary facilities to limit pollution,” Richard Lu, analyst at CRU consultancy in Beijing told The Economic Times.

Steel’s return to the upside also comes amid news of declining rebar inventories in China. 

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