"China's real estate sector is the biggest X-factor for the steel market globally this year," said Ivan Szpakowski, chief investment officer at Academia Capital LLC. "We've clearly turned the corner into a downward phase of the property cycle, and I do think there is a real risk for steel that we go back toward where we were a year ago."

Steel and iron ore surged in 2016 after a poor start as China’s “old economy” roared back with the help of government stimulus and a credit boom. At the heart of the rebound was a pick-up in construction that helped steel demand expand about 2 percent last year, versus expectations of a 5 to 6 percent decline, according to Szpakowski. Construction accounts for the biggest part of steel demand in the top consumer, according to Bloomberg Intelligence.

China's home prices have shown signs of slowing as local governments and banks follow Beijing's orders to tighten the market and rein in asset bubbles. At the same time, stockpiles have expanded at an "unprecedented" pace since the start of this year, Szpakowski noted. Iron ore inventory at China's ports rose to a record 127 million metric tons last week, according to Shanghai Steelhome Information Technology Co., while stockpiles of reinforcement bar used in construction surged to 8.2 million tons, the highest since April 2014.

"We're much more leveraged now than we've been in two years, in terms of inventory throughout the whole supply chain, whether it's traders or steel mills, or whether it's iron ore or steel," said Szpakowski.

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