Spot iron ore prices fell to the lowest level in more than 2-1/2 years, weighed down by sluggish demand in top consumer China, which reported disappointing industrial output and lower inflation on Thursday, spurring hopes for more easing moves by the central bank.
Benchmark 62 percent-grade iron ore fell $1.30 from day ago to $114.90 per tonne on Wednesday, its lowest point since Dec. 29, 2009, according to data from The Steel Index.
China's annual consumer inflation fell to a 30-month low in July, while industrial output growth slowed to the weakest in more than three years, suggesting that the central bank has scope to ease monetary policy further after rate cuts in June and July to keep the economy on track to meet an official 2012 growth target of 7.5 percent.
A further deceleration in the producer price index, which fell 2.9 percent from a year earlier, also underscores sluggish demand and overcapacity in some industries.
Most analysts expect Beijing to cut rates again in the third quarter, but traders said the government needed to take more action to boost infrastructure investment in order to lift steel demand, which has suffered in part because of a crackdown on the property market that has curbed construction of residential projects.
"The problem is there is no demand for steel. What steel mills and other end users really need right now are orders.
Without a pickup in physical demand, the supply glut will worsen even if they were to get more credit from banks," said a trader with a large state-owned trading company in Beijing.
The most-traded January rebar contract on the Shanghai Futures Exchange inched up 0.65 percent to 3,691 yuan ($581) per tonne, still within sight of a record low of 3,631 yuan struck on Friday.
Still, any economic improvement will be fragile as the euro zone debt crisis and a sluggish U.S. recovery keep global growth at a low ebb, the main factor that pushed China's new export orders in July into their steepest fall in eight months.
Chinese steel prices have already fallen 11 percent since the start of the year and are down 16 percent since this year's high of 4,405 yuan struck in April. The slump in prices has also pushed many steel mills into the red.
Market participants see few prospects for steel prices and iron ore demand to stage a convincing rebound in the second half of the year, since demand will only have a small window for a pickup in September-October before slipping into a lull again through the winter months.
"As long as Beijing doesn't ease its controls on the property sector, we may not be able to see a significant rebound in steel demand," said Qiu Yuecheng, an analyst with XiBen New Line Co Ltd, a steel products trading platform in Shanghai.
"Some investors are seeing a floor price of 3,500 yuan, but I expect prices to fall to as low as 3,300 yuan before posting a sizeable rebound towards the end of the first quarter," the trader said