Shanghai steel futures fell nearly 1 percent to three-month lows on Monday as tighter credit continued to cloud the outlook for steel demand in top market China.
China's central bank raised bank reserve ratios last week for the ninth time since October to try to curb inflation that is running at its quickest pace in nearly three years.
"At the rate China continues to tighten policy, I think domestic steel demand will suffer," said a shipping manager for an iron ore trading firm in Shanghai.
"Another major factor is the heavy rains in many parts of China which are slowing construction activity."
The most-traded October rebar contract on the Shanghai Futures Exchange dropped to as low as 4,685 yuan per tonne, its weakest since March 24, before closing at 4,688 yuan, down 0.9 percent.
A further decline in steel prices could weaken demand for iron ore, the key steelmaking component. Iron ore prices have been stuck in narrow ranges since falling to two-month lows earlier this month.
The Steel Index's 62-percent iron ore benchmark .IO62-CNI=SI dropped 0.3 percent to $173.60 a tonne on Friday and a similar index by Platts IODBZ00-PLT eased 0.4 percent to $175.
Despite tighter credit and weather issues hitting steel demand, China's steel production remained strong.
China's daily crude steel output rose 2.7 percent to 1.9674 million tonnes in the first 10 days of June from the previous 11 days, industry website Custeel.com said on Friday, citing data from the China Iron and Steel Association.
Some mills have restocked imported ore to boost low inventory levels.
Stockpiles of imported iron ore at major Chinese ports rose for the seventh straight week last week to a record 93.53 million tonnes, industry consultancy Mysteel said on Friday.
Offers for Indian ore with 63.5 iron content were steady at $180-$182 a tonne, including freight on Monday, Chinese consultancy Umetal said.
"I think iron ore prices will stabilise around the $180 levels," said a trader in Shenzhen.
"They will not drop too much because of tighter Indian supply during the monsoon season but prices will not also go up too quickly given thin demand." Monsoon rains usually slow iron ore exports from India, the world's No. 3 supplier, from June through September.Iron ore forward swaps have mostly fallen last week after recent steep gains, highlighting investor concerns about the direction of spot prices.
The Singapore Exchange-cleared July contract dropped almost $2 to $166.81 a tonne on Friday. The August contract fell $1.67 to $165.75 and September slipped $2.02 to $165.06