China rebar steel futures fell more than 2 percent to their lowest in nearly six weeks on Monday, weighed by a hazy outlook for demand in the world's largest consumer and thinning appetite for key raw material iron ore.
September and October are normally strong consumption periods for steel in China but Beijing's credit tightening campaign has hurt demand and the boost from the government's cheap housing project is waning, traders said.
"Steel demand is not that strong, possibly because demand from the affordable housing project is dropping. There are no official figures but probably about 80 percent of the project is either completed or work has already started," said a shipping manager for an iron ore trading firm in Shanghai.
China's bid to build 10 million social housing units this year had helped push mills to produce steel at a record pace, with average daily output staying above 1.9 million tonnes from late February, compared with 1.7 million tonnes in 2010.
But now there are concerns the world's largest steel producer may be facing a huge surplus if demand doesn't pick up before winter.
"October would be the last chance for steel prices to rebound since demand normally slows during winter," said the Shanghai-based shipping manager.
The most-traded January rebar contract on the Shanghai Futures Exchange slid 2.3 percent to close at 4,622 yuan. It dropped to as low as 4,614 yuan earlier, its weakest since Aug. 9.
Monday's percentage fall was the steepest since Aug. 5 when the contract dropped nearly 2.4 percent.
The weakness in steel prices has weighed on iron ore, with index-based spot prices easing to or holding at levels last seen in mid to late August.
Platts' 62-percent grade iron ore index IODBZ00-PLT slipped 50 cents to $179.50 a tonne on Friday and a similar gauge by the Steel Index .IO62-CNI=SI steadied at $177.90.
Metal Bulletin's iron ore index .IO62-CNO=MB dropped 80 cents to $177.04 a tonne.
Tight supplies from India, the world's No. 3 iron ore supplier which sells most of its material via the spot market, should keep losses in iron ore prices in check.
"I don't think they'll collapse, but maybe prices will range from the low $170s to low $180s," said a Singapore-based trader.
Also likely to support demand for seaborne iron ore would be an expected decrease in China's domestic concentrate production during winter, he said.
Iron ore prices could rebound after China's National Day holiday that falls during the first week of October.
"With the current uncertain situation, I don't expect mills to be buying ore, but after the holiday there may be a rush to restock," said another Shanghai-based trader.
But given the recent drop in prices, global miner BHP Billiton could offer fewer cargoes on the spot market this week, traders said.
Traders said BHP sold around 10 capesize cargoes via tenders last week although prices for its 63-grade Newman iron ore fines slipped to about $180 a tonne, cost and freight, from $182 at the start of last week.