Singapore, 27 October 2011: Reuters

Iron ore extended losses on Wednesday and was on course for its steepest ever weekly price slide as slowing growth in top consumer China curbed steel prices and hit demand for the steel-making raw material. China's appetite for iron ore has weakened along with slowing demand for steel from its construction sector, pushing down prices for iron ore by about 30 percent since early September.

Iron ore is China's biggest commodity import in terms of volume and could serve as a leading indicator of slowing growth, which could impact its demand for other raw materials. It comes at a time when the outlook for developed economies is already shaky.

Some mills in China have stopped buying iron ore as they curb steel output. China buys around two thirds of seaborne cargoes to feed the world's largest steel industry and is the biggest market for the mining giants Vale , Rio Tinto and BHP Billiton.

Weak steel demand across Asia cut profits at Japan's two biggest steelmakers -- Nippon Steel Corp and JFE Holdings Inc -- in the fiscal six months to September, and both slashed their full-year outlooks.

Australian producer Fortescue Metals Group , which sells nearly all of its iron ore to China, said it could take months for prices to recover as Chinese mills work off inventories. "The market has come under huge pressure with prices moving $5-10 each day, and until steel prices stabilise in China, I can see prices falling further," said Roddy Mann, senior iron ore trader at London-based Metalloyd. "People are worried about steel production cuts; some mills have been cutting production by 20-30 percent ... There is still some space for iron ore prices to soften further and there is little light at the end of tunnel currently."

Iron ore with 62-percent iron content fell by about 3.3 percent to $127.40 a tonne on Wednesday after the steepest fall on record at 7.2 percent the previous day, according to the Steel Index.

The steel-making ingredient has fallen by more than 10 percent so far this week and was on track for its biggest loss since the Steel Index was launched at the end of 2008. The Metal Bulletin index fell by 4.3 percent to $127.76, while the Platts assessment was not available due to a national holiday in Singapore on Wednesday.

"Much of this fall is sentiment driven," said Christopher Ellis, an analyst at the Metal Bulletin iron ore index. "Underlying changes in fundamental demand and supply have not been so severe. Many market commentators were keen to point out that iron ore prices were remaining strong when other global commodities were slumping over the summer; now iron ore has caught up."

CHINA'S ECONOMY THE KEY

The rapid drop in iron ore prices "implies demand for steel in China is pretty bad and a lot of steel mills have to cut production, so the whole economy is bad", said Henry Liu, regional head of commodity research at Mirae Asset Securities in Hong Kong.

"If iron ore prices drop so much, it doesn't mean (Chinese mills') profit margin will improve, because steel demand has been dropping," he said. The price of hot rolled coil in China fell 8.7 percent to 4,123 yuan ($648) a tonne at the end of last week, while rebar shed more than 6 percent to 4,296 yuan a tonne, according to data compiled by Bank of America-Merrill Lynch.

The world's second-largest economy expanded 9.1 percent in the third quarter, its weakest pace since early 2009 due to weaker export markets and tighter monetary policy. China has repeatedly raised interest rates and banks' reserve requirement ratio to sap liquidity and fight price rises. Premier Wen Jiabao reiterated on Tuesday that taming inflation remained the top priority for the Chinese government.

A growing number of Chinese steel mills have shut for maintenance -- effectively curbing output to cut losses. "Steel mills have started to cut production and have suspended  iron ore purchases, while miners keep on producing and delivering spot cargoes, so we see iron ore prices diving these days," said an iron ore buying official with a mid-sized steel mill in south-central China. "We're just buying on a hand-to-mouth basis now."

Just a few months ago, China's construction sector demand had steel and iron ore markets flying high. China's monthly crude steel output hit a record 60.25 million tonnes in May as mills raced to keep up with a construction boom aided by the country's drive to build more cheaper homes.

That helped iron ore prices stay high for most of the year, after rising to a record $193 a tonne in mid-February. But the momentum faltered in September when steel prices fell at the start of what is usually a peak consumption season in China.

China's crude steel output fell 3.5 percent to 56.7 million tonnes in September, the lowest in seven months, from August. "Everyone is desperate to lower their production costs right now. Demand for steel is very weak. If you look at investment in high-speed rail, for example, there has been a fall of 50 percent," said Xu Zhongbu, chief executive of Beijing Metal Consulting, which works for some leading Chinese steel mills.

The big drop in spot prices forced miners to forego the more costly quarterly contracts for Chinese clients, giving them the option to buy at prices closer to spot.

Vale, which had been selling most of its cargoes via longterm contracts, said last week it was open to different pricing options.

Ends --

Reuters - fro Commodities Now.