SINGAPORE, April 13 (Reuters) - Shanghai steel futures dropped on Friday, coming off a three-month high hit earlier in the session, after data showed the Chinese economy grew at its weakest pace in nearly three years in the first quarter.
Steel demand in China, the world's biggest consumer and producer, is predicted to be brisk in coming months on a seasonal pickup in construction activity. But a slower economy could dent that demand, curbing steel output and China's appetite for key raw material iron ore.
China's economy grew an annual 8.1 percent in January-March, less than the 8.3 percent economists had forecast, raising investor concerns that a five-quarter long slide has not bottomed and that more policy action would be needed to halt it.
"The GDP data could reinforce concerns about steel demand," said a Shanghai-based iron ore trader.
The most-traded October rebar contract on the Shanghai Futures Exchange slipped 0.3 percent to close at 4,377 yuan ($690) a tonne, after rising as high as 4,405 yuan earlier, its loftiest since Jan. 17.
Rebar rose slightly for the week, its second straight week of gains.
Chinese steel prices have mostly bounced off lows in January and February as demand improved slightly, but prices have, at best, steadied since.
China's Baoshan Iron & Steel, whose pricing moves are seen as a bellwether for the industry, said on Thursday it would keep the prices of its main steel products unchanged for May bookings, suggesting demand could cool next month.
Still, mills lifted steel output to a record high of 61.58 million tonnes in March, anticipating the seasonal pickup in demand will come through.
BUBBLE WILL BURST?
"We expected a recovery in steel production, but didn't expect it would grow so much," said Henry Liu, head of commodity research at Mirae Asset Securities in Hong Kong.
"There will be a correction eventually. Now it's only a matter of when the bubble will burst or how it will burst amid rising risks."
That cautious tone was reflected in the thin activity in the iron ore spot market, with hesitation flowing through to buyers after prices touched six-month highs.
Benchmark iron ore with 62 percent iron content.IO62-CNI=SI was little changed at $148.80 a tonne on Thursday, according to Steel Index. But it was still the highest level since Oct. 18, 2011.
"I haven't heard any new deals. People are still digesting the price surge and waiting to see whether there is enough momentum to take the market higher," the Shanghai trader said.
"Where steel prices are, I don't think a lot of mills will choose to buy more raw material at this time."
Prices of imported ore in China were unchanged on Friday, according to industry consultancy Umetal.
But other market players were hopeful.
"Both crude steel output and pig iron output in China rose rapidly in March, obviously a good sign that iron ore demand remains robust and thus support iron ore prices," said a steel trader in Beijing.
"Steel demand growth has been slowing, but the overall demand remains healthy."