SINGAPORE: Spot iron ore slipped on Tuesday as lower steel prices in top market China discouraged steel mills from buying more of the raw material after some replenished stockpiles last week.
Slow Chinese steel demand and uncertainty over when it will pick up significantly have forced producers to limit iron ore purchases, trapping prices in narrow ranges below $120 a tonne and clouding prospects for the raw material to rebound to this year's highs.
Price offers for iron ore cargoes in China from top exporter Australia fell by a dollar per tonne on Tuesday, according to Beijing-based consultancy Umetal.
A further price drop in spot transactions should push down the benchmark 62-percent grade iron ore for a fourth day running on Tuesday. The price fell 1.3 percent to $113 a tonne on Monday, based on data from information provider Steel Index.
Despite recovering from last month's three-year low below $87, the price is still about a quarter below this year's high of $149.40.
"There's still some buying going on, but buyers are asking for discounts," said a Shanghai-based iron ore trader. "People generally tend to be skeptical about taking cargoes when they see steel prices dropping. But I think prices won't go below $110."
The price of steel billet in China's key Tangshan area fell by 70 yuan to 3,220 yuan ($510) a tonne on Monday, after last week's gains, traders said, showing how fragile the country's steel market remains amid uncertainty over a recovery in end-user demand.
Sentiment in the sector remained bearish, said analysts at investment bank Macquarie, who met officials of Chinese steel mills before China's National Day break early in October.
"There had been a modest recovery in orders/sales at some mills but nothing significant," Macquarie said in an Oct 13 report.
"There was little confidence that the government would provide any form of stimulus in the near term -- announcements relating to infrastructure investment were viewed as being long dated, with demand starting to come through in mid-2013 at the earliest."
Chinese steel mills also reported a reduction in the volume of iron ore they were holding and although some had restocked after this year's slump in prices, Macquarie said mills' participation in the price rally back to above $100 "was very limited".
Some Chinese mills are also securing their iron ore supplies from long-term contracts with miners and are not in a hurry to buy from the spot market, a trader in Hong Kong said.
Those with smaller iron ore needs prefer to buy from stockpiles at Chinese ports, which tends to be cheaper than fresh cargoes, traders said.
Iron ore stockpiles at major Chinese ports had fallen to 96.4 million tonnes last week from 97.3 million in late September, data from Chinese consultancy Steelhome showed. That is the lowest level of port inventories since early June.
"Right now, we're afraid of taking cargo. We made good money on two cargoes three weeks back when prices, were on the bounce, but now we're not taking any new shipment," said the Shanghai trader.
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