By Ruby Lian and Fayen Wong
SHANGHAI, June 20 (Reuters) - Shanghai steel futures slipped on Thursday from the previous session's three-week high, after weak manufacturing data from China darkened the outlook for demand in the world's largest consumer.
China's factory activity contracted to a nine-month low in June, heightening risks that a second-quarter slowdown could be sharper than expected, and adding to investor fears that a swelling glut of steel supply would keep a lid on prices.
'Investors remain concerned over the cooling economic growth as data suggested faltering demand, while sluggish activity in the physical market also dragged down futures, though the rally in iron ore has saved rebar from a rapid fall,' said Xia Junyan, an analyst with Wanda Futures in Shanghai.
The most active rebar futures contract on the Shanghai Futures Exchange, for October, was down about half a percent at 3,482 yuan ($569) a tonne by the close. It hit a three-week high of 3,530 yuan on Wednesday.
Steel output in China is at record highs as mills are keen to retain market share despite declining margins, reversing former market expectations that mills would slash output to lift prices.
'Steel mills will face declining margins and are on the brink of making losses between May and June,' Zhang Changfu, vice chairman of the China Iron & Steel Association said in a transcript published on the website.
Zhang expected China's crude steel output to increase 6 percent to 8 percent in the first half from a year ago, as steel output is not likely to be slashed sharply in June.
China produced a total of 301.19 million tonnes of crude steel in the first five months, up 8 percent from a year ago. That was much higher than annual growth of 3 percent in 2012.
Spot iron ore prices surged to a near four-week high as traders bought cargoes at rising prices, although some traders see a turning point soon, given the weak steel demand outlook.
Three similar deals for 62-percent Australian iron ore fines were sealed at $121 a tonne via the Singapore-based GlobalORE in late Wednesday, up more than one dollar compared with the previous deals, trader said.
A tender of 165,000 tonnes Australian Pilbara iron ore fines was sealed at $120.5 a tonne on Thursday.
'Chances are very high that some big traders are deliberately buying cargoes at such high prices in a bid to push up the market as real purchases from steel mills remain tepid,' said an iron ore trader in Beijing.
'I would expect the current level to be the turning point, given weak steel demand outlook.'
The benchmark 62-percent grade iron ore index stretched gains to $120 for a fifth straight day on Wednesday, up 2 percent, or $2.3, from Tuesday and the highest level since May 27, according to information provider the Steel Index. ($1=6.1269 Chinese yuan)
(Editing by Clarence Fernandez) Keywords: MARKETS IRONORE/
(email@example.com)(+86 21 6104 1797)(Reuters Messaging: firstname.lastname@example.org)
Copyright Thomson Reuters 2013. All rights reserved.
The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.