Shanghai rebar steel futures rebounded on Wednesday after losing more than 4 percent in the past eight sessions, but the modest gain suggests the outlook for China's steel demand
remained shaky, limiting buying interest in iron ore.
Tighter credit in China, the world's biggest steel producer and consumer, is slowing demand for steel and also restraining mills from replenishing stocks of iron ore, a key raw material.
The most traded January rebar contract on the Shanghai Futures Exchange closed up 0.5 percent at 4,633 yuan a tonne.
Rebar, used in construction, fell to a six-week trough of 4,585 yuan a tonne on Tuesday, when its eight-day loss reached 4.4 percent.
"Technically there will be a rebound after a big decrease," said an iron ore trader in Rizhao city in China's eastern Shandong province.
"But many traders believe this is not the bottom and they're looking for a further decrease. The market's really bad," he said, adding that the debt-stressed euro zone was adding to worries at home about China's continuing monetary tightening.
China has repeatedly raised interest rates and banks' required reserve ratio among other measures to mop up excessive liquidity.
Premier Wen Jiabao said last week China would keep its monetary policy tight and wrestling inflation remained the top policy priority.
Because of the recent drop in steel prices, iron ore spot rates have eased, with fewer market deals as slower steel demand and fewer funding options give Chinese mills fewer reasons to buy iron ore.
"The domestic credit tightening campaign has caused steel mills to almost stop restocking iron ore because they barely have money to buy," said a Shanghai-based iron ore trader.
"Mills have to sell their products at a lower price to get their money back."
Providing proof of sluggish demand for iron ore was the sale by Indian exporter Sesa Goa of 54-percent grade lump ore via tender at $135 a tonne, cost and freight, on Tuesday, down from $137.50 earlier this month, the Shandong-based trader said.
"Sentiment is really bad. Most mills usually go to the market to restock iron ore before the October holidays, but I still see no sign of that," he said.
China's financial markets will be shut for the week-long National Day holiday from Oct. 3-7.
Offers for Australian 62-grade Newman iron ore fines dropped a dollar to $180-$182 a tonne, C&F, on Wednesday, said Chinese consultancy Umetal. Quotes for Indian 63.5/63 grade ore were steady at $185-$187.
Index-based spot prices fell again on Tuesday to their lowest since mid-August.
Platts' 62-percent grade iron ore index IODBZ00-PLT dipped 50 cents to $178.25 a tonne and a similar gauge by Steel Index .IO62-CNI=SI eased 10 cents to $177.40.
Metal Bulletin's iron ore index .IO62-CNO=MB dropped 34 cents to $176.60 a tonne.
Prices of iron ore forward swaps mostly extended losses as investors bet on further declines in spot values.