Shanghai steel futures jumped 7 percent to their highest in nearly three weeks on Tuesday, supported by promises from China's top steelmaking province to further reduce production capacity.
Raw material iron ore followed steel's rally, soaring 8 percent to its strongest in more than three weeks, with coking coal climbing nearly 8 percent.
Hebei, which accounts for about a quarter of China's total steel output, plans to slash 31.86 million tonnes of steel and ironmaking capacity this year, the official Xinhua news agency reported on Sunday.
That would be more than double the 14.62 million tonnes of steel capacity that Hebei cut last year.
"While smog concerns still threaten to lower steel output, a drive to cut outdated steel capacity is also pressuring production lower," Commonwealth Bank of Australia analyst Vivek Dhar said in a note.
The most-active rebar on the Shanghai Futures Exchange SRBcv1 closed up 7 percent at the exchange-set ceiling of 3,167 yuan ($457)a tonne, its highest since Dec. 22.
A better outlook for the Chinese economy also bodes well for steel prices, said Helen Lau, analyst at Argonaut Securities.
"Overall, the stable downstream demand and reduced supply boost positive sentiment towards steel markets," said Lau.
China's economic growth last year was expected to be around 6.7 percent, said Xu Shaoshi, director of the National Development and Reform Commission. Beijing had targeted growth of 6.5-7.0 percent.
Xu also said China's steel and coal sectors will face increasing pressure this year to cut capacity as the government ramps up efforts to tackle polluting heavy industries and address a glut.
Rebar's rally lifted iron ore futures and could help stretch gains for spot iron ore prices.
Iron ore on the Dalian Commodity Exchange DCIOcv1 jumped 8 percent to end at 594 yuan a tonne, also hitting the upside limit and strongest level since Dec. 16.
Iron ore for delivery to China's Qingdao port <.IO62-CNO=MB> climbed 1.9 percent to $77.73 a tonne on Monday, according to Metal Bulletin.
Also swept up in Tuesday's rally were coking coal DJMcv1, which rose 7.8 percent to 1,268 yuan a tonne, and coke DCJcv1, which soared 9 percent to hit the day's upside limit of 1,687 yuan. ($1 = 6.9257 Chinese yuan)
