The Chinese government's continuous efforts to fight air pollution while slashing overcapacity in the coal and steel sectors have driven up the prices of some steel products, prompting domestic traders to take a bullish outlook for 2017.
Prices of commodities including iron ore, coking coal and steel rebar surged more than 5 percent to highs not seen since April 2014, according to market news website eastmoney.com. The price of hot-rolled steel jumped by more than 4 percent.
The rally followed a recent announcement by the government of North -China's Hebei Province, which said it will launch an investigation into the illegal production of steel products.
The price of hot-rolled steel - trading at an average price of 3,700 yuan ($537) per ton - has skyrocketed more than 50 percent since the beginning of this year, said Wang Jian, who worked at major domestic steel producer Han-Steel for years and is now a trade partner with the company in Handan, a city in Hebei where steel is a pillar industry.
"Local authorities have also been working hard to improve air quality, which accelerated a crackdown on small and medium-sized illegal furnaces," Wang told the Global Times on Wednesday.
The government has been looking into the effects of slashing the capacity glut and tackling air pollution, said Wang Guoqing, research director at the Beijing Lange Steel Information Research Center. Since November 24, investigation groups have gone to six provinces with the goal of curbing illegal activities during the process of reducing overcapacity - specifically cutting down the number of medium-frequency furnaces.
"The medium-frequency induction furnaces are usually used to produce steel products that fail to meet quality standards, which is hazardous for the environment," Wang told the Global Times on Wednesday.
The recent crackdowns on these furnaces, in addition to the shrinking output of steel makers, have been weighing on the supply of some products.
"For example, there was a supply shortage in East China's Jiangsu Province after the government's moves," Wang noted.
In Jiangsu, total output of medium-frequency induction furnaces accounts for more than 25 percent of the province's steel output, according to the research center.
"For example, the province's crude steel output is nearly 150 million tons, of which 40 million tons was produced by those furnaces," said Wang, the research director.
Prices of steel rebar and other steel products have doubled since the beginning of the year, which has driven up the profits of trading companies. "Prices are going up every day," noted Wang, the trader. "There is more demand for hot-rolled steel than steel rebar because the latter is used primarily in housing construction, which is now in its off-season."
